Often expatriate employees accrue retirement and/or pension benefits while working for an employer. If you decide to move back home (Canada in this case), what should you do with the 401k or IRA account?

Your options are to:

1. Leave your 401K or IRA in the US and have someone manage the investments for you;
2. Cash out the plan and pay a lot of unnecessary tax;
3. Start to take a retirement distribution (if you are of retirement age);
4. Transfer the plan to an RRSP in Canada.

An added complexity to these four choices is that they are affected by tax implications and securities regulations.

Option 1) Leave your 401k/IRA in the US

If you choose this option, you would essentially leave the plan intact until you require the income during retirement. Unless the manager of the 401k permits, you may be required to transfer the 401k to an IRA. If you are over the age of 59.5, you would see a 20% withholding tax on your distributions. If you are under this age threshold, there would be an additional 10% penalty tax unless you meet certain conditions. There would be no real tax implications on the earnings within the plan until you begin to make withdrawals. In Canada, the Canada Revenue Agency (CRA) would typically tax you on an IRA if the USA's Internal Revenue Service (IRS) takes a similar position, which normally happens once you start withdrawals.

Choosing to leave the plan as is in the US can also lead to other challenges. Many investment firms and brokerages will not allow an investment account (retirement account or otherwise) to be held by a non-resident. You will need to open an investment account with either a discount/online broker or a full service investment firm before terminating your US residency. If you wait until you have moved to Canada to secure investment accounts and initiate transfers of IRAs, it may be cumbersome although not impossible. Unlike some Canadian investment firms, US investment firms are very reluctant to have an investment/retirement account held by a non-resident of the US.

Option 2) Cash out the plan and pay a lot of unnecessary tax;

This option is perhaps the least favored. There is no compelling reason why you should redeem your IRA and cash out the plan, unless you are in desperate need of cash. For the vast majority of individuals it just doesn't make sense from either an investment management or tax perspective.

Option 3) Start to take a retirement distribution;

This option is only truly relevant for those old enough to consider retirement. While resident in Canada, retirement distributions from your US based 401K will be subject to US withholding tax. The distribution will also be declared as a foreign pension in Canada by CRA. Consult a qualified crossborder tax professional to ensure proper reporting of such foreign income and to optimize use of foreign tax credits.

Option 4) Transferring a 401k / IRA to an RRSP in Canada

A 401k is an employer sponsored defined contribution (DC) retirement arrangement. If contributions were made by your employer while you were a resident of US, you will be allowed to make a lump-sum transfer from your 401k. Specifically, you will be able to transfer a 401k to a rollover IRA (employer permitting) and then transfer the IRA to a Canadian RRSP.

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In more detail, the transfer of a 401k ultimately to an RRSP usually occurs as follows:

1. Open a Rollover IRA account with an investment firm capable of crossborder investment management.
2. Rollover the 401k to an IRA while still a resident of the US. You cannot roll a 401k directly to an RRSP.
3. Withdraw all of the IRA as a Canadian resident (you will be assessed 20% withholding tax, possibly reduced to 15%). If you are under 59.5 years, there will be an additional 10% penalty which is not recoverable.
4. The net resulting lump sum payment is then transferred to an RRSP. The subsequent deposit into an RRSP must occur in the year of withdrawal or within 60 days of year-end.
5. Determine the value of the transfer in Canadian dollars.
6. The full gross withdrawal including the withholding tax is included as Canadian income with a deduction referencing a section 60(j)(ii) transfer. This results in no additional tax liability to Canada.
7. The 20% withholding tax paid to the IRS in point number "3" above may be claimed as a foreign tax credit (FTC) for Canadian tax purposes. FTCs require a more detailed explanation.

Now the complications. The 401k must be a lump-sum transfer from a pension or superannuation and employment services rendered while a non-resident of Canada. There are different rules for individuals living in Canada and working in the US or in the case of temporary employees working in the US for less than 5 years.

The withholding tax paid to the IRS that is claimed as a foreign tax credit in Canada requires the advice of a tax practitioner. Generally, the taxes paid in the US can be used to reduce the tax liability in Canada. However, since the concept of FTCs are multi-faceted, it can take several years of claiming credits to attempt to recoup the initial 20% withholding tax that was paid.

Please bear in mind that you haven't really paid tax to Canada at this point on the IRA withdrawal, only to the IRS. Therefore, you need to have sufficient Canadian income tax owing from certain sources in order to utilize the FTCs. Canada views the IRA withdrawal as a transfer while the US views it as an early lump sum withdrawal and thus applies the 20% withholding tax.

A final distinction also needs to made if the IRA account has been subject to proceeds from a ROTH conversion. Such conversions would taint the account and this technique would become muddied because Canada does not recognize ROTH plans in the same context as "foreign retirement arrangements." Furthermore, Canadian Tax Free Savings Accounts (TFSAs) and ROTHs are separate categories with another set of rules and guidelines for anyone wishing to move across the border.

What about the reverse, transferring from an RRSP/LIRA to an IRA?

Thus far we have only explored the mechanics of a person moving from the US to Canada but what solutions exist for a person moving from Canada to the US? Unfortunately, RRSPs or LIRAs (locked-in plans) cannot be transferred to an IRA. Please also be aware that the place and timing of these transactions should be aligned with pre- and post-move planning that captures the realities of residency and ceasing of non-residency. Many aspects of the information contained herein can also be applicable to retirement arrangements from other countries like the United Kingdom.

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The reason for this change in policy would most likely be due to the country's response to the uprisings across the Middle East last year. Fearing unrest, the government of Saudi Arabia has unveiled a huge increase to public spending that totals almost $130 billion. The Saudi commitment to stabilizing oil in the $100/barrel range should serve as a wakeup call for consumers and investors alike.

The reason that Saudi Arabia's budget should matter is that as the nation spends money at a breathtaking clip, it will require higher oil prices to keep its budget from spilling large amounts of red ink. It is thought that like last year, the nation will end up spending more money than the official budget calls for. Therefore, the world should not look to Saudi Arabia to use its powers of persuasion and size amongst its OPEC peers to reign in oil prices. In fact, the Institute of International Finance estimates that the break-even oil price for Saudi Arabia will move to $110 over the next three years.

Furthermore, as the chart shows it is not just Saudi Arabia that needs high oil prices to meet its spending commitments. Russia needs prices of over $100/barrel to balance its budget. Together, Saudi Arabia and Russia account for a little over 20% of the world's oil production. Therefore, it would be hard to argue that these two major oil producers would be willing to bring down prices.

One unintended outcome of these budget constraints amongst the oil producing nations is that the longer oil prices stay elevated, the more the energy industry will spend to find new sources of oil. Improvements in drilling technology have allowed oil to be found at ever greater depths in the oceans and allowed parts of North America to become new and significant oil producers. For example, North Dakota now produces over 500,000 barrels daily and its production now surpasses that of OPEC member Ecuador.

For consumers this means that hope at the gas pumps will prove ill advised. For investors, this should mean that continued investment in the oil shale plays in Texas, North Dakota and other parts of North America should continue.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Disclaimer:This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance. Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.

As investors take a look at the state of the world and inventory a list of the problems that challenge the global economy, perhaps one that is not being considered revolves around political leadership. In France, President Nicolas Sarkozy is embroiled in a political scandal. Italian Prime Mininster Silvio Berlusconi continues to fiddle while Rome burns (figuratively speaking).  In the United Kingdom, Prime Minster David Cameron is trying to ensure that he is sufficiently distanced from the News Corp. phone hacking scandal.  For Japan, a revolving door of Prime Ministers continues to usher out one Prime Minister after another. In India, anger over corruption is beginning to taint its well respected Prime Minister Manmohan Singh. 
 
For the United States, there is little in the way of scandal that is raising voter frustration. The “to do” list for the US starts with reigning in the federal budget deficit and begin to formulate a coherent policy to bring down the national debt.  As well, US employment must be stimulated at the same time as budget cuts are made - a difficult task to say the least.
 
Even the Federal Reserve, recognizing that it is close to out of bullets, has implored the White House and Congress to come up with fiscal policy initiatives to stimulate the economy and reduce spending.  It should be noted that up until now, the Federal Reserve has always been above partisan politics. But the political environment is such that even the Fed is feeling political pressure.  
 
With a Fed low on ammunition, high unemployment, voter frustration and a divided political system, many are looking to the 2012 election as a catalyst to possibly shake up economic policy.

This brings us to the chart included which shows real corporate profit growth and presidential re-election outcomes over the last century.  Corporate profits are a barometer for the state of the economy.  If corporate profits are falling, then things on Main Street to Wall Street are not usually going well.  For most of 2010, corporate profits rose and the stock market continued its ascent from 2009 but the benefits on Main Street were not being seen to the same extent.  But now, the stock market is showing anxiety to match that of the average voter.
 
As a result, weak or negative real corporate earnings growth in the last two years leading to a re-election bid has corresponded with a changing of the guard in the White House.  The only true exception to this has been Theodore Roosevelt in the 1904 election who was "re-elected" after taking over the presidential reigns from McKinley despite overseeing negative real corporate earnings growth.  Gerald Ford, oversaw negligible corporate earnings growth in the two years prior to his "re-election" bid against Jimmy Carter but also lost.
 
The Obama administration is no doubt aware of the importance of the economy.  Perhaps bold and unexpected moves to stimulate the economy could emerge in attempts for the President to win a second election.  Either way, continued deterioration of corporate earnings and corporate earnings estimates for 2011 and 2012, could forecast a change in the White House. 

One of the central planks of the Tea Party's political platform that helped to contribute to the landslide Republican wins in the US mid-term elections was based on the fervor of its members and supporters to tame the deficit and to make permanent the Bush tax cuts. However, when asked, many voters who are angry at the level of government spending want to exclude Social Security, Medicare/Medicaid and the Department of Defense.

This past weekend, one particular show was asking the panel whether President Obama’s economic policies are responsible for stabilizing the economy and the financial markets. The White House has been expressing its opinion that its stimulus program, jobs bill and various other policies are starting to have an impact.

What is interesting is that in the heat of political debate, there is one person who does not seem to get any credit and that person is Ben Bernanke. As head of the Federal Reserve, he was confronted with a financial crisis that was unprecedented in scope. The policy making playbook needed some instant updating as events were seemingly spinning out of control.

While the level of fiscal policy coordination amongst the major economies was certainly helpful in instilling confidence to help turn the tide, Bernanke led the charge from the monetary policy side of the rescue effort.

Watching the political pundits kick the issue around while missing key facts in their discussion is sometimes frustrating. For example, if we look at the stocks that comprise the S&P 100 Index (an index of the 100 largest members of the S&P 500 stock market index) we can see that the share prices of 29 of these 100 companies bottomed either before the 2008 Presidential election even took place or before Obama even officially took office.

The point is that the markets – as they so often do – are able to discount the future into stock prices well before consensus logic prevails in declaring an end to an economic crisis.

If we look at the S&P/TSX 60 Index (which is comprised of the 60 largest companies in Canada that account for the vast majority of Canadian stock market capitalization), we see that 33 of these 60 companies touched their low points before Obama was even sworn in as President.

The objective of pointing out these observations is not to advocate one political viewpoint or another. Rather, it is to inject another perspective that is hopefully devoid of political bias and is able to add some objectivity to the debate.

Another factor we can look at is the TED Spread. The TED spread is defined as the difference between the interest rates on interbank loans and short-term US government debt. In a normally functioning market environment, banks lend funds to each other for short periods of time. But when Lehman Brothers collapsed, fear was prevalent and interbank lending ground to a halt.

As a result, the TED spread rose quickly. Taking the lead, Bernanke launched unprecedented policy measures in coordination with other major central banks in order to get financial institutions to begin lending to one another again. As fear began to recede, the TED spread dropped.