The Executive's Exit: Why Your Private 457(b) Can't Cross the Border (and What to Do About It)
Written by: Dean Moro, BComm, CIM®, CRPC™ & Carson Hamill, CIM®, CRPC™, FCSI®: Cross-Border Portfolio Managers at Snowbirds Wealth Management
For C-suite executives, physicians, and non-profit leaders, the 457(b) plan is one of the best tools for deferring income and reducing taxes. But if you're planning a move to Canada, this retirement asset can quickly become a costly tax trap.
Most people assume their 457(b) works like a 401(k). When it comes to moving to Canada, this assumption can be expensive.
Governmental 457(b) plans (for state and local employees) can be rolled into an IRA or 401(k) before you move north.
Private 457(b) plans (common at hospitals, universities, and non-profits) cannot. These plans are legally classified as "unfunded deferred compensation"—the money technically belongs to your employer until you receive it. You can't roll it over to an IRA, and you can't take the plan with you to Canada. You can only take the cash.
Not All 457(b) Plans Are Created Equal
What Happens When You Move to Canada
When you leave your employer to relocate, your private 457(b) typically pays out as a lump sum. This creates three major tax problems:
1) Immediate taxation in both countries. The entire balance appears as wages on your W-2. If this happens the year you become a Canadian resident, you could hit the top tax bracket in both countries simultaneously - often exceeding 50% combined.
2) No RRSP shelter available. Unlike a 401(k) or IRA, which can sometimes be transferred tax-free to a Canadian RRSP, your 457(b) distribution doesn't qualify. Canada treats it as compensation, not a pension transfer. You'll pay full tax with no ability to defer.
3) Timing mismatches create complications. Social Security and Medicare taxes are often withheld when your benefits vest, not when you receive the money. This mismatch can trigger double taxation if not addressed proactively.
How to Protect Yourself
If you're moving to Canada with a private 457(b), advanced planning is essential:Explore installment payment options. Many plans allow highly compensated employees to elect a 5- or 10-year payout instead of a lump sum. This election usually must be made before you leave your job. Spreading the income over several years can cut your tax bill dramatically.
Time your move strategically. If possible, trigger the distribution in a year when you're still a U.S. resident only. This avoids Canada's higher marginal rates and eliminates cross-border complexity.
Claim foreign tax credits properly. Your Canadian return should claim a credit for all U.S. taxes withheld. This requires coordination between advisors on both sides of the border.The Bottom Line
Your private 457(b) can't follow you to Canada. If you're planning a move, address this now - not six months before your relocation. The earlier you plan, the more options you'll have to minimize the tax impact and preserve your hard-earned savings.
Ready to Plan Your Cross-Border Move?
If you are planning on moving to the USA from Canada, don't leave your finances to chance. We specialize in cross-border financial planning, investments, and wealth management, working closely with your tax accountants and lawyers to ensure a fully integrated strategy.About Snowbirds Wealth Management
Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focused on the cross-border market. Together with Dean Moro and Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders.
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