I'm Canadian and Inheriting a US IRA or 401(k). How Is It Taxed?

Both countries tax it, and the treaty sorts out the overlap. The US withholds tax at source when the distribution is paid to a non-US beneficiary (30% by default, reduced to 15% under the Canada-US tax treaty for periodic payments, which is the characterization that applies to most distributions paid over time). Canada includes the full distribution in your income and gives you a foreign tax credit for the US withholding. If the distribution qualifies as a superannuation or pension benefit attributable to services rendered while you were not resident in Canada, ITA 60(j) may let you deduct an offsetting amount that you contribute to your RRSP.

What does the US withhold?

A distribution from a US IRA or 401(k) to a non-resident alien beneficiary is subject to withholding under IRC 1441. The default rate is 30%. The Canada-US tax treaty reduces the rate depending on how the distribution is characterized:

Periodic payments (Article XVIII(2)): 15% withholding. Most distributions paid as an annuity or in installments over the beneficiary’s life expectancy or a fixed period qualify as periodic payments. The key is that the payments must be “periodic”: paid at regular intervals, not a single lump.

Lump-sum distributions: the treaty treatment depends on the article. A lump-sum distribution from a pension plan may still qualify for a reduced rate under Article XVIII, but the analysis is more complex. Some custodians apply the 30% default to lump sums and let the beneficiary claim a refund on a US return. Others apply 15% if the beneficiary provides a Form W-8BEN claiming the treaty rate.

The beneficiary needs to provide a completed W-8BEN to the IRA custodian or 401(k) plan administrator, claiming the treaty-reduced rate and providing their Canadian tax identification (SIN). Without the W-8BEN, the custodian withholds at 30%.

The inherited IRA rules under the SECURE Act (2019) and SECURE 2.0 (2022) also govern the distribution timeline. Most non-spouse beneficiaries must distribute the entire account within 10 years of the original account holder’s death (the 10-year rule). Spouse beneficiaries can roll the inherited IRA into their own IRA if they are US persons, but a Canadian non-US-person spouse cannot do that.

How does Canada tax the distribution?

Canada includes the full gross amount of the distribution in income. Not the net-of-withholding amount; the full amount before US tax was deducted. If the US withheld 15% on a $100,000 distribution, Canada taxes $100,000, not $85,000.

The distribution is reported as foreign pension income on the T1. The classification depends on the nature of the payment:

• A periodic payment from a pension plan is reported on line 11500 (other pensions and superannuation) or line 11600 (elected split-pension amount if pension splitting applies).
• A lump-sum payment may be reported differently depending on whether it is characterized as a retiring allowance (ITA 248(1)) or a pension benefit.

The foreign tax credit under ITA 126(1) offsets the double taxation. You claim a credit for the US tax paid, limited to the Canadian tax attributable to the foreign income. If the US withheld 15% and the Canadian marginal rate on the income is 40%, the credit covers the 15% and you pay the remaining 25% to Canada.

Can I roll it into an RRSP?

Possibly. ITA 60(j) allows a deduction for a superannuation or pension benefit that you designate and contribute to an RRSP, if five conditions are met:

1. The payment is a superannuation or pension benefit (broadly defined under ITA 248(1))
2. The benefit is not part of a series of periodic payments
3. The benefit is attributable to services rendered in a period throughout which you were not resident in Canada
4. The payment is included in your income for the year
5. You contribute the designated amount to your RRSP in the year you receive the payment or within 60 days after the end of that year

The deduction is not limited by your RRSP contribution room. It is a separate deduction that works independently of the annual RRSP limit.

The tricky condition is #2: the benefit must not be part of a series of periodic payments. If you take a lump-sum distribution, this condition is met. If you take the distribution in annual installments over the 10-year SECURE Act window, each installment may or may not be “part of a series of periodic payments” depending on the structure. The CRA has not issued definitive guidance on whether 10-year SECURE Act distributions constitute periodic payments for 60(j) purposes.

Condition #3 is usually met for an inherited account: the original account holder earned the pension benefit while working in the US, during a period when the beneficiary (the Canadian inheritor) was not resident in Canada at the time the services were rendered. But the language is technical, and the connection between the beneficiary and the original service period is an area where the CRA’s position is not fully developed.

The 401(k)/Roth IRA guide covers the 60(j) mechanics in detail, including the gap between the gross distribution and the net amount after US withholding (you can only deduct what you contribute, and the withheld amount does not reach your RRSP unless you fund the gap from other resources).

What if the original account holder was Canadian?

If the deceased was a Canadian citizen who moved to the US and accumulated the IRA/401(k) while working in the US, the inheritance works the same way for a Canadian beneficiary. The US treats the distribution as US-source income subject to withholding. Canada taxes it as foreign pension income. The treaty withholding rate and the W-8BEN mechanics are the same regardless of who originally earned the account.

If the deceased was a Canadian who never left Canada and somehow held a US retirement account (less common, but possible through cross-border employment or totalization), the same rules apply. The US taxes the distribution to the non-resident beneficiary, and Canada taxes the worldwide income.

What about estate tax?

A US-situs IRA or 401(k) is a US-situs asset for estate tax purposes. If the deceased was a non-resident alien (a Canadian who was not a US person), the estate tax exemption for non-residents is only $60,000, and the IRA value counts toward the estate. The treaty provides a pro-rata unified credit that can significantly reduce or eliminate the estate tax, but the estate return (Form 706-NA) is still due.

If the deceased was a US citizen, the full unified credit applies ($13.99 million in 2025), and the IRA is included in the US estate but typically below the exemption.

The estate tax is a separate obligation from the income tax on the distribution. Both can apply: estate tax on the value of the IRA at death, and income tax on the distributions as they are paid out.

What should I do next?

Contact the IRA custodian or 401(k) plan administrator and provide a completed W-8BEN claiming the treaty rate. Understand the 10-year distribution requirement and plan the distribution schedule to manage the Canadian tax bracket impact. Evaluate whether 60(j) applies to your specific fact pattern and, if it does, make sure you have RRSP room or understand that the 60(j) deduction operates outside the normal room limits. Talk to a cross-border preparer before the first distribution, not after.

• What happens to my 401(k) and Roth IRA when I move back to Canada?, the 60(j) mechanics for your own account
• US estate tax for Canadians: the $60,000 exemption, the estate tax side of the inheritance
• Getting the 15% treaty rate on IRA and 401(k) income in Canada, the withholding mechanics for distributions

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.