I'm trying to figure out how much tax a Canadian (non-resident alien) would have to pay on an IRA withdrawal. I see there is a treaty rate of 15% for "pension" payments but I'm assuming that is just for periodic withdrawals after the age of 59.5.
What would be the US withholding taxes for lump-sum IRA withdrawals by a Canadian? And how does the answer differ depending on whether the individual is over 59.5 years or under?
Thanks!
U.S. Withholding Tax on IRA Withdrawal
Moderator: Mark T Serbinski CA CPA
IRA withdrawals by Cdn residents should be withheld 15%, plus 10% if under 59.5. That applies to any type of withdrawal and would be final payment.
If you are under 59.5, and can show that you are making "pension-like" periodic withdrawals, then -- with IRS approval -- you can have the company not withhold the penalty (this is known as SEPP -- which I do not advise unless you are nearing 59). There a re couple of other expenses that can be used to make some or all of a withdrawal non-penalized (you'd dermine this after the witholding is done, on a 1040NR).
The 15% tax is creditable in canada against the IRA income you need to report (which is all of it), but the penalty is not.
You could always file a 1040, and reduce the tax on tghe withdrawl (reporting world income, like a US citizen living in Canada) , but this will not help your over-all taxation, since Canada wil also tax it, and this won't get rid of the penalty.
My consistent advice is tha tif you did not collapse your IRA or convert your IRA before leaving US, leave it 'til retirement and treat it like a pension. or revisit the issue when/if you ever become Cdn non-resident again.
If you are under 59.5, and can show that you are making "pension-like" periodic withdrawals, then -- with IRS approval -- you can have the company not withhold the penalty (this is known as SEPP -- which I do not advise unless you are nearing 59). There a re couple of other expenses that can be used to make some or all of a withdrawal non-penalized (you'd dermine this after the witholding is done, on a 1040NR).
The 15% tax is creditable in canada against the IRA income you need to report (which is all of it), but the penalty is not.
You could always file a 1040, and reduce the tax on tghe withdrawl (reporting world income, like a US citizen living in Canada) , but this will not help your over-all taxation, since Canada wil also tax it, and this won't get rid of the penalty.
My consistent advice is tha tif you did not collapse your IRA or convert your IRA before leaving US, leave it 'til retirement and treat it like a pension. or revisit the issue when/if you ever become Cdn non-resident again.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Hi nelsona,
Actually, it appears the CRA has reversed its position about the 10% penalty and it is now eligible for the FTC. See the following link:
http://www.kpmg.com/Ca/en/IssuesAndInsi ... %20FTC.htm
With this change, I'm curious how it might change your recommendation?
With the full 25% (15% treaty withholding + 10% penalty) eligible for FTC in Canada, it seems to me that there should no longer be much of difference weather a Canadian under 59.5 years old withdraws early from either an RRSP or an IRA. With credit for all the US tax/penalty, I would think that you'd end up just paying the equivalent of the Canadian tax (effectively the same as you'd pay for an equivalent RRSP withdrawal).
And certainly, taking lump sums from an IRA seems to make more sense than setting up a SEPP program which has additional risks of withdrawal SNAFUs. Thoughts?
Thanks!
Actually, it appears the CRA has reversed its position about the 10% penalty and it is now eligible for the FTC. See the following link:
http://www.kpmg.com/Ca/en/IssuesAndInsi ... %20FTC.htm
With this change, I'm curious how it might change your recommendation?
With the full 25% (15% treaty withholding + 10% penalty) eligible for FTC in Canada, it seems to me that there should no longer be much of difference weather a Canadian under 59.5 years old withdraws early from either an RRSP or an IRA. With credit for all the US tax/penalty, I would think that you'd end up just paying the equivalent of the Canadian tax (effectively the same as you'd pay for an equivalent RRSP withdrawal).
And certainly, taking lump sums from an IRA seems to make more sense than setting up a SEPP program which has additional risks of withdrawal SNAFUs. Thoughts?
Thanks!
Hey, thatnks for that piece of news! For the record, the ruling (which is not available on line) is 2011-0398741I7.
Before you jump for joy, remember that FTCs are credited on an "effective" taxrate basis, while the foreign income is taxed at the marginal rate.
So, before making the decision to pay 25%, make a calculation using your current situation, adding the entire mount to your income. $50K in IRA revenue will no doubt be taxed at about 40% taxrate or more, but then take a look at the eeffctive rate (tax/taxable_income). It may not be over 25%, but it would ceretainly be more than 15%.
So the penalty will probably still make a differnce in the toatl amount you pay for the IRA: 15+10+(<40)-(<25).
At that point however it just might make it worthwile to file 1040 (reporting world income) to figure out the real IRS tax on the IRA.
It also brings back at least the possibility of doing the IRA to RRSP 'transfer' for smaller IRAs.
Its still not as good however as doing the IRA to Roth conversion whjile in US., in my opinion, but its comparable.
Before you jump for joy, remember that FTCs are credited on an "effective" taxrate basis, while the foreign income is taxed at the marginal rate.
So, before making the decision to pay 25%, make a calculation using your current situation, adding the entire mount to your income. $50K in IRA revenue will no doubt be taxed at about 40% taxrate or more, but then take a look at the eeffctive rate (tax/taxable_income). It may not be over 25%, but it would ceretainly be more than 15%.
So the penalty will probably still make a differnce in the toatl amount you pay for the IRA: 15+10+(<40)-(<25).
At that point however it just might make it worthwile to file 1040 (reporting world income) to figure out the real IRS tax on the IRA.
It also brings back at least the possibility of doing the IRA to RRSP 'transfer' for smaller IRAs.
Its still not as good however as doing the IRA to Roth conversion whjile in US., in my opinion, but its comparable.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
As usual, it looks like you are correct! I just ran a few scenarios with various IRA withdrawal levels and it's pretty much impossible to get the tax on the IRA below ~31%.
Do you know if its possible to do a SEPP on your own or does the IRA custodian need to administer it? The reason I ask is that it appears that some custodians will not do a SEPP for non-resident aliens. But what is to prevent you from doing the annual withdrawal calculations on your own and taking out regular distributions (just like a cooperating custodian would do for a US person)? The custodian will take out 25% based on having a W8-BEN on file and age under 59.5 (since they don't know you are SEPPing it). But then at year-end you file a 1040 (or a 1040NR?) along with form 5329 with exception code 2 to get back the 10%. Would that work?
Do you know if its possible to do a SEPP on your own or does the IRA custodian need to administer it? The reason I ask is that it appears that some custodians will not do a SEPP for non-resident aliens. But what is to prevent you from doing the annual withdrawal calculations on your own and taking out regular distributions (just like a cooperating custodian would do for a US person)? The custodian will take out 25% based on having a W8-BEN on file and age under 59.5 (since they don't know you are SEPPing it). But then at year-end you file a 1040 (or a 1040NR?) along with form 5329 with exception code 2 to get back the 10%. Would that work?
Let me know what you find out.
SEPP has to last until you are 59.5, so don't bother. look instaed of filing 1040, or drawing down IRA is anyear when you have a qualifying event for no penalty.
SEPP has to last until you are 59.5, so don't bother. look instaed of filing 1040, or drawing down IRA is anyear when you have a qualifying event for no penalty.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
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