I am looking at my different options on pulling my rrsp down to the us.
I have a couple questions on collapsing your rrsp - and paying the 25% cnd withholding tax.
Q1
My wife and I have four RRSP accounts, each of us has a locked-in and non-locked in account.
In retirement - if we collapse all four accounts in the same year we would be well into the 35% US tax bracket.
To avoid this I was wondering if we could collapse each RRSP account in a different year.
IE; Collapse my locked-in acnt in yr1, my non-locked acnt in yr2, my wife's ..
Thus spreading the US income (coming in from the collapsing of the RRSPs) over four years.
This would reduce our US tax burden dramatically.
Q2
I have a question on how US tax is calculated give the RRSP book value and Cnd withholding.
This is best layed out in an example - lets assume the following for one of my accounts
- For simplicity lets assume that $1cnd=$1Us
- RRSP Book value amt when I moved to US = $ 50K
- RSSP Amount when I collapsed acnt = $300K
- Cnd WithHolding Tax = $ 75K (25% of 300K)
The US Taxable amount would be
- RSSP Amount when I collapsed acnt = $300K
- subtract book value when I moved = $250K ($300-$50)
That $250K of income would then be subject to the current US tax rate brackets
- $ 0.00 $16,750.00 10%
- $ 16,750.00 $68,000.00 15%
- $ 68,000.00 $137,300.00 25%
- $137,300.00 $209,250.00 28%
- $209,250.00 $373,650.00 33%
For simplicity lets say that amount rolled out to be $90K in US taxes.
But I would have a tax credit of $75K from the Cnd withholding tax.
Therefore I would have a total US tax of $15K ($90K-$75K) that I would need to pay at the 33% level.
Is that correct?
Thanks in advance
Questions on collapsing RRSP account
Moderator: Mark T Serbinski CA CPA
Couple of points:
Your LIRA accounts are fully taxable in US. Since they were based on pension income (and not persoanl contributions) theuy get no tax-free ammount in US.
Foreign tax credits are designed NOT to give you full credit for your foreign tax, in that they add your foreign income at marginal rate, but limit the credit to effective rate.
It would be a good idea though to collapse one at a time, in my opinion.
Your LIRA accounts are fully taxable in US. Since they were based on pension income (and not persoanl contributions) theuy get no tax-free ammount in US.
Foreign tax credits are designed NOT to give you full credit for your foreign tax, in that they add your foreign income at marginal rate, but limit the credit to effective rate.
It would be a good idea though to collapse one at a time, in my opinion.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Nelsona :
Q1
With reference to collapsing our RRSP accounts one at a time (per year).
Do you know if this is doable from a Canadian tax perspective?
IE;
If I am collapsing my "locked-in" account - then will they force me to also collapse my "non-locked" at the same time?
Q2
Just to be clear - when you refer to my LIRA accounts : "they get no tax-free ammount in US".
I am assuming you are referring to the "book value of these accounts (when I entered the US)" is not looked upon as 'tax free' by the IRS.
Therefore the "book value" of these LIRA accounts are a non-issue as far as the IRS is concerned - and I will pay full taxes on these accounts when I collapse them.
Is that correct?
Q3
I am trying to wrap my head around what you said about "foreign tax credits" and how my rrsp will be "added to our US marginal tax rate".
Lets say our US income (including colaped rrsp) is $300K- this easily pushes us into the top marginal brackets (28% and 33%).
So simplicity lets say my total US tax owing is then calculated to be $100K.
Then the 'foreign tax credit' that I paid to the Candian gov is a straight credit against my US tax owing.
IE; If I paid $75K Cnd Withholding - it would then mean I owe $25K (100K us-tax-owing minus 75K foreing tax credit).
Do I have this right?
Thanks
Q1
With reference to collapsing our RRSP accounts one at a time (per year).
Do you know if this is doable from a Canadian tax perspective?
IE;
If I am collapsing my "locked-in" account - then will they force me to also collapse my "non-locked" at the same time?
Q2
Just to be clear - when you refer to my LIRA accounts : "they get no tax-free ammount in US".
I am assuming you are referring to the "book value of these accounts (when I entered the US)" is not looked upon as 'tax free' by the IRS.
Therefore the "book value" of these LIRA accounts are a non-issue as far as the IRS is concerned - and I will pay full taxes on these accounts when I collapse them.
Is that correct?
Q3
I am trying to wrap my head around what you said about "foreign tax credits" and how my rrsp will be "added to our US marginal tax rate".
Lets say our US income (including colaped rrsp) is $300K- this easily pushes us into the top marginal brackets (28% and 33%).
So simplicity lets say my total US tax owing is then calculated to be $100K.
Then the 'foreign tax credit' that I paid to the Candian gov is a straight credit against my US tax owing.
IE; If I paid $75K Cnd Withholding - it would then mean I owe $25K (100K us-tax-owing minus 75K foreing tax credit).
Do I have this right?
Thanks
1. No, you can choose to un-lock one at a time, and this has no effect on your other account(s). The only thing is when you unlock the LIRA, you must take it all out at one time.
2. Correct. these accounts have no 'basis' reagrdless of when you became a US taxpayer.
3. lets use a better example. Say you have $100K of US income, and 50K of RRSP reportable income. While in essence you are paying US tax on the RRSP income at your marginal rate (from 100K to 150K), IRS will limit your foreign tax credit to your effective rate (ie. 1/3 of your overall IRS tax on 150K). You will find that these 2 numbers are very different. The first may be 13K, the second would be closer to 8K. Regardless of how much Cdn tax you paid to get your RRSP, IRS will limit your foreign tax credit to 8K.
In other words, don't expect full use of the Cdn tax on your US returns..
In actuality, this effect goes away the higher your income, but I would not advise triggering the 33% tax bracket just to use up your Cdn tax.
The idea is to balance the use of your Cdn tax without triggering the highest US tax bracket.
it also illustrates why it is unwise to hold on to your RRSP after leaving canada unless you intend to use the RRSP as a pension, making small yearly withdrawals tax in canada at 15% instead of 25%.
You have built up a large US taxable burden with a lot of tax owing on both sides of the border.
2. Correct. these accounts have no 'basis' reagrdless of when you became a US taxpayer.
3. lets use a better example. Say you have $100K of US income, and 50K of RRSP reportable income. While in essence you are paying US tax on the RRSP income at your marginal rate (from 100K to 150K), IRS will limit your foreign tax credit to your effective rate (ie. 1/3 of your overall IRS tax on 150K). You will find that these 2 numbers are very different. The first may be 13K, the second would be closer to 8K. Regardless of how much Cdn tax you paid to get your RRSP, IRS will limit your foreign tax credit to 8K.
In other words, don't expect full use of the Cdn tax on your US returns..
In actuality, this effect goes away the higher your income, but I would not advise triggering the 33% tax bracket just to use up your Cdn tax.
The idea is to balance the use of your Cdn tax without triggering the highest US tax bracket.
it also illustrates why it is unwise to hold on to your RRSP after leaving canada unless you intend to use the RRSP as a pension, making small yearly withdrawals tax in canada at 15% instead of 25%.
You have built up a large US taxable burden with a lot of tax owing on both sides of the border.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Nelsona
I want to make sure I understand the how the Foreign Tax Credit works.
I always feel that an example is worth a thousand words - so let me know if I have this right.
The following example is based on filer in 2011 with a filing status of 'married filing jointly'.
http://www.dinkytown.net/java/TaxMargin.html
US taxable income (after all deductions) = $70.0K
US tax = $6.8K
US effective taxrate = 9.7%
CND RRSP = $20.0K
Book Value Of RRSP when entered US = $ 5.0K
US taxable portion of RRSP = $15.0K ($20K-bookvalue)
CND withholding tax on collapsing RRSP = $ 5.0K (25% of 20K)
US taxable portion of RRSP (from above) = $15.0K
New US taxable income = $85.0K ($70+$15K)
Marginal Rate of this additional $15K = 15.0%
Additional US tax on 15K = $2250 (15% of 15K.0)
US foreign tax credit = $1455 (9.7% of 15.0K)
Additional US tax after apply FTC = $ 795 ($2250-$1455)
So in addition to the 25% Cnd Tax of $5000 - I would be paying an additional $795 in US tax.
As you said - this is because the FTC is based on the 'effective tax rate' - where as any CND RRSP income goes straight on top of your last dollar earned - so its US tax basis is the marginal rate.
Assuming that I have this right then I think that the following would be prudent :
* Do not collapse my RRSP until I retire and I have no income coming from my business
* If I have any invest dollars either
- invest them in stocks and do not cash out until after I have completed the RRSP collapse (or else $ will become income)
- invest in financial vehicles that will generate Foreign Income
This way 100% of my worldly income will be foreign sourced - so my Foreign Tax Credit will negate any US tax that I normally would have to pay.
Does this sound correct?
Thanks
I want to make sure I understand the how the Foreign Tax Credit works.
I always feel that an example is worth a thousand words - so let me know if I have this right.
The following example is based on filer in 2011 with a filing status of 'married filing jointly'.
http://www.dinkytown.net/java/TaxMargin.html
US taxable income (after all deductions) = $70.0K
US tax = $6.8K
US effective taxrate = 9.7%
CND RRSP = $20.0K
Book Value Of RRSP when entered US = $ 5.0K
US taxable portion of RRSP = $15.0K ($20K-bookvalue)
CND withholding tax on collapsing RRSP = $ 5.0K (25% of 20K)
US taxable portion of RRSP (from above) = $15.0K
New US taxable income = $85.0K ($70+$15K)
Marginal Rate of this additional $15K = 15.0%
Additional US tax on 15K = $2250 (15% of 15K.0)
US foreign tax credit = $1455 (9.7% of 15.0K)
Additional US tax after apply FTC = $ 795 ($2250-$1455)
So in addition to the 25% Cnd Tax of $5000 - I would be paying an additional $795 in US tax.
As you said - this is because the FTC is based on the 'effective tax rate' - where as any CND RRSP income goes straight on top of your last dollar earned - so its US tax basis is the marginal rate.
Assuming that I have this right then I think that the following would be prudent :
* Do not collapse my RRSP until I retire and I have no income coming from my business
* If I have any invest dollars either
- invest them in stocks and do not cash out until after I have completed the RRSP collapse (or else $ will become income)
- invest in financial vehicles that will generate Foreign Income
This way 100% of my worldly income will be foreign sourced - so my Foreign Tax Credit will negate any US tax that I normally would have to pay.
Does this sound correct?
Thanks
Problems in your example;
The marginal rate of tax of US tax on the 15K is 25% not 15%. So your US tax is actually higher
The marginal rate you use in determining the FTC limit is AFTER you have added the Cdn income, not before, so your marginal rate is wrong. It should be higher.
On your assumptions:
Waiting to take out: That is what I said earlier.
Your other option is to convert to RRIF and take out small ammounts at 15% Cdn tax, trying to stay in the 15% marginal rate (by using 401(K), SEP, etc.
RRSP income is considered general limiation income, not passive. So genrating foreign passive income will not help. You need to generate general income, like working outside US.
The marginal rate of tax of US tax on the 15K is 25% not 15%. So your US tax is actually higher
The marginal rate you use in determining the FTC limit is AFTER you have added the Cdn income, not before, so your marginal rate is wrong. It should be higher.
On your assumptions:
Waiting to take out: That is what I said earlier.
Your other option is to convert to RRIF and take out small ammounts at 15% Cdn tax, trying to stay in the 15% marginal rate (by using 401(K), SEP, etc.
RRSP income is considered general limiation income, not passive. So genrating foreign passive income will not help. You need to generate general income, like working outside US.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Bottom line: RRSP growth while in US is very highly taxed (combined canada/US) especially if you take it out in lump-sums when you have other income.
the best is to EITHER take it out assoon after you arrive in US as possible, taking the 25% hit, but themn having the funds to invest more tax efficiently in US, OR wait to take out as pension (at 15% cdn tax) when your income is lower.
the best is to EITHER take it out assoon after you arrive in US as possible, taking the 25% hit, but themn having the funds to invest more tax efficiently in US, OR wait to take out as pension (at 15% cdn tax) when your income is lower.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Nelsona
If I understand this correctly then the best RIF strategy would be to aim to have a total worldly income (including RRIF income) around the upper end of the 15% marginal bracket.
This way the US AVERAGE TAX RATE will be closest to the US MARGINAL TAX RATE of 15% (approx 4.25%).
Then our US Foriegn Tax Credit (based on our US AVE TAX RATE) will be closest to what we paid in Canadian Taxes (15%).
Does that make sense?
Any other 'best practices' tips?
If I understand this correctly then the best RIF strategy would be to aim to have a total worldly income (including RRIF income) around the upper end of the 15% marginal bracket.
This way the US AVERAGE TAX RATE will be closest to the US MARGINAL TAX RATE of 15% (approx 4.25%).
Then our US Foriegn Tax Credit (based on our US AVE TAX RATE) will be closest to what we paid in Canadian Taxes (15%).
Does that make sense?
Any other 'best practices' tips?
Nelsona :
I am not sure if I framed up the question correctly - so let me try again
With a RIF there will be a
* Canadian Tax : 15% Canadian withholding tax
* US Tax : RIF will be taxed at my MARGINAL RATE (worldly income)
* US Tax Credit : Tax credit will be based on my AVERAGE TAX RATE
So it makes sense to me that I will always want the AVE-RATE as close to the MARGINAL-RATE as possible (smallest spread).
When I look at the following tax calculator I can see how this plays out :
https://www.americanpatriotbank.com/calc/TaxMargin.html
I enter
- married filing jointly
- different "wage" amounts
- all within the 15% marginal rage
Since I am already paying 15% Canadian tax - it makes sense I keep my US tax in the same MARGINAL bracket (15%) - and then try to max the US tax credit.
For the 15% marginal tax rate - the spread between the AVE and MARGINAL can be any where between 9% and 5%.
I can see that spread between the MARGINAL-RATE and AVE-RATE is smallest when "total wages" are around the upper end of the 15% marginal bracket.
So if I understand this correctly then the best RIF strategy would be to aim to have a total worldly income (including RRIF income)
around the upper end of the 15% marginal bracket.
Am I correct in my analysis here - or am I missing something?
Note that this calculator includes standard deductions in the 'wages'.
I am not sure if I framed up the question correctly - so let me try again
With a RIF there will be a
* Canadian Tax : 15% Canadian withholding tax
* US Tax : RIF will be taxed at my MARGINAL RATE (worldly income)
* US Tax Credit : Tax credit will be based on my AVERAGE TAX RATE
So it makes sense to me that I will always want the AVE-RATE as close to the MARGINAL-RATE as possible (smallest spread).
When I look at the following tax calculator I can see how this plays out :
https://www.americanpatriotbank.com/calc/TaxMargin.html
I enter
- married filing jointly
- different "wage" amounts
- all within the 15% marginal rage
Since I am already paying 15% Canadian tax - it makes sense I keep my US tax in the same MARGINAL bracket (15%) - and then try to max the US tax credit.
For the 15% marginal tax rate - the spread between the AVE and MARGINAL can be any where between 9% and 5%.
I can see that spread between the MARGINAL-RATE and AVE-RATE is smallest when "total wages" are around the upper end of the 15% marginal bracket.
So if I understand this correctly then the best RIF strategy would be to aim to have a total worldly income (including RRIF income)
around the upper end of the 15% marginal bracket.
Am I correct in my analysis here - or am I missing something?
Note that this calculator includes standard deductions in the 'wages'.
OK.
You are missing one thing however, that the 15% tax you pay in canada turns out to be MUCH more of a percentage of your US taxable income.
For example, a $K withdrawl will yield $1K in Cdn tax, but may only generate $1K of US income, so your credit will only be, buy your scenario, $90
You don't want to build up too much of a credit carryforward either.
This will be helped by the CPP/OAS that you report on your US return but pay no tax in canada on.
You are missing one thing however, that the 15% tax you pay in canada turns out to be MUCH more of a percentage of your US taxable income.
For example, a $K withdrawl will yield $1K in Cdn tax, but may only generate $1K of US income, so your credit will only be, buy your scenario, $90
You don't want to build up too much of a credit carryforward either.
This will be helped by the CPP/OAS that you report on your US return but pay no tax in canada on.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing