I'm very confused about how the taxation of withdrawals from an IRA, 401K and RRSP seem to differ. I have read every post I could find on this topic and can't seem to figure this out.
Let's assume a US citizen and Canadian resident has a 401K, IRA and RRSP.
It's my understanding that if a US Citizen makes a withdrawal out of an IRA (while resident of Canada), the entire amount is taxed in the US and Canada. Taxed first in US and then is Canada. I assume 15% withholding (as per treaty) would be withheld in US, but you would still have to report the entire withdrawal on your 1040 and perhaps pay more tax (depending on other sources of income, etc). Then tax on Canadian return with corresponding foreign tax credit for the TOTAL amount of tax you pay to the US (15% withholding plus extra tax on 1040 - if applicable). This does not make sense to me. Why would you have to pay Canadian tax on the IRA contributions (not growth portion) for which you never received a deduction for on the Canadian side?
I have also read that if you make a withdrawal out of a 401K the entire amount is NOT taxable in both the US and Canada. Yes 100% taxable in US (which makes perfect sense), but you only have to pay tax on the growth in Canada (track own contributions "ACB" and only pay tax on growth). This makes sense to me because you did not get credit for a deduction on the Canadian side when you made the contributions. Why do the rules seem to differ for IRA vs. 401K, or I'm I not understanding this correctly?
I have also read something very similar for RRSP's. As long as you file 8891 form for RRSP only the growth is taxed on the US return (you are required to track your own contributions "ACB" to determine this amount - similar to 401K) and the entire amount is taxed on the Canadian return .
How does this seem fair? Why would a US citizen have to report the entire withdrawal of an IRA on the Canadian side and pay tax on the full amount, but only have to report the growth portion on the RRSP on the US side, not the full amount? Perhaps I'm missing something. Any clarification on this would be greatly appreciated.
Related question: What if I was a US citizen resident in Canada with a $500K RRSP (Growth = $200K and contributions = $300K). Now I "step-up" my ACB by making a fund switch before I leave Canada and move to US permanently; then withdraw the entire $500K. 25% tax is withheld in Canada as non-resident (final tax obligation). Do I report any of this on US return? There is no growth to report...
IRA 401K RRSP Confusion
Moderator: Mark T Serbinski CA CPA
First off IRA and 401(K) are treated identically for CDn tax purposes. All taxable except for contributions made while a CDn resident and not permitted to be deducted from your Cdn return. So that would be any IRA contrib made while living in Canada, and any 401(K) contrib made while living in Canada before 2009, when they became deductible, ALL else is taxable. Citizenship doesn't matter.
The tax you pay in US on these funds will not be 15% flat. It will be calculated on your tax return, and will almost surely be less than 15%. If its more, came back and we will discuss.
RRSPs are taxable almost the same way. The only difference is what was not deductible in US when the contribs were made. Since a Cdn non-US citizen was never taxable in US, everything in his RRSP is non-taxable up until he moves,
For a US citizen, an RRSP was NEVER non-taxable, so he merely deferred taxation unrtil he moved. His non-taxable portion ois ONLY his contributions to private plans (never deductible) and his contributions to employer RRSP ( before 2009, when the became deductible.)
Canada taxes income, all income, unles a treaty prevents them. Nothing in the treaty prevents Canada from taxiing US pension money the same way US does, which is 100%.
US gives a break to non-residents before they came, because it never fully recognizes RRSPs, and treats them like ordinary funds, If you were Cn and had an ordinary account, why would you be taxed on all the growth from the past 20 years when you arrived?
The tax you pay in US on these funds will not be 15% flat. It will be calculated on your tax return, and will almost surely be less than 15%. If its more, came back and we will discuss.
RRSPs are taxable almost the same way. The only difference is what was not deductible in US when the contribs were made. Since a Cdn non-US citizen was never taxable in US, everything in his RRSP is non-taxable up until he moves,
For a US citizen, an RRSP was NEVER non-taxable, so he merely deferred taxation unrtil he moved. His non-taxable portion ois ONLY his contributions to private plans (never deductible) and his contributions to employer RRSP ( before 2009, when the became deductible.)
Canada taxes income, all income, unles a treaty prevents them. Nothing in the treaty prevents Canada from taxiing US pension money the same way US does, which is 100%.
US gives a break to non-residents before they came, because it never fully recognizes RRSPs, and treats them like ordinary funds, If you were Cn and had an ordinary account, why would you be taxed on all the growth from the past 20 years when you arrived?
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This is super helpful!! I think the citizenship was confusing me. I just needed to think about this in terms of residency.
1) If you never owned a 401K before 2009, I suppose there will no longer be a need to track your ACB correct? Just gross up your income on the Canadian side by the contribution every year and deduct it on your Canadian return. Then when you make a withdrawal, the entire amount is taxed in Canada correct? If you did own a 401K before 2009, you just pay tax on the growth from inception to 2009 (not contributions while resident of Canada) and tax on everything after this point (growth and contributions post 2009)?
2) You’re right; tax in US on 15K IRA withdrawal was less than $500. Form 2555 to eliminate all employment income and social security not taxed in US via treaty (resident of Canada). Problem was I thought I had to include entire $15K on Canadian side. Just didn’t seem right to me. Have a very large tax bill in Canada of over $5K as a result of the inclusion. The majority of contributions to IRA were made as resident of Canada (Lived in Canada, commuted to US to work, made 401K contributions and converted 401K to IRA). Will have to get out records to calculate this correctly, should only have to include a small percentage of the $15K on Canadian side correct (growth portion)?
3) Just confused by this statement “Canada taxes income, all income, unless a treaty prevents them. Nothing in the treaty prevents Canada from taxiing US pension money the same way US does, which is 100%â€. This contradicts what was said above does it not? This seems like it suggests that the entire $15K would have to be taxed in Canada? Please clarify.
4) Thought I would be taxed on growth from past 20 years if I did not physically make a fund switch before leaving Canada. Didn’t think I would be taxed up front, would defer with 8891 and then pay tax in future when withdraw. Would just have a lower starting point (ACB) because I did not “crystallize†the gains before I left Canada. Is this no longer required? I have read that it was required somewhere on this forum. Thought treaty provides no automatic step-up for RRSP like it does for principal residence and non-registered investments deemed to be disposed of on departure?
5) So excluding the new 2009 rules, a US citizen Canadian resident who moves to US, will always pay tax in US on RRSP growth portion only, never the contributions as you outlined above. So the advantage of a non-US citizen with an RRSP is they don’t have to pay tax on any of the withdrawals in the US (growth or contributions). So it’s theoretically possible for non-US citizen to move to US, withdraw entire RRSP and only pay 25% to Canada, nothing to US? US citizen would pay 25% to Canada and report growth portion on 1040 only, taking foreign tax credit for prorated 25% (growth portion only) from Canadian side?
6) What if the roles were reversed and a US citizen made all IRA contributions as a resident of US and then moved to Canada and made a full withdrawal? I assume this would work in reverse and you would not pay any tax to Canada correct?
Thanks again!!
1) If you never owned a 401K before 2009, I suppose there will no longer be a need to track your ACB correct? Just gross up your income on the Canadian side by the contribution every year and deduct it on your Canadian return. Then when you make a withdrawal, the entire amount is taxed in Canada correct? If you did own a 401K before 2009, you just pay tax on the growth from inception to 2009 (not contributions while resident of Canada) and tax on everything after this point (growth and contributions post 2009)?
2) You’re right; tax in US on 15K IRA withdrawal was less than $500. Form 2555 to eliminate all employment income and social security not taxed in US via treaty (resident of Canada). Problem was I thought I had to include entire $15K on Canadian side. Just didn’t seem right to me. Have a very large tax bill in Canada of over $5K as a result of the inclusion. The majority of contributions to IRA were made as resident of Canada (Lived in Canada, commuted to US to work, made 401K contributions and converted 401K to IRA). Will have to get out records to calculate this correctly, should only have to include a small percentage of the $15K on Canadian side correct (growth portion)?
3) Just confused by this statement “Canada taxes income, all income, unless a treaty prevents them. Nothing in the treaty prevents Canada from taxiing US pension money the same way US does, which is 100%â€. This contradicts what was said above does it not? This seems like it suggests that the entire $15K would have to be taxed in Canada? Please clarify.
4) Thought I would be taxed on growth from past 20 years if I did not physically make a fund switch before leaving Canada. Didn’t think I would be taxed up front, would defer with 8891 and then pay tax in future when withdraw. Would just have a lower starting point (ACB) because I did not “crystallize†the gains before I left Canada. Is this no longer required? I have read that it was required somewhere on this forum. Thought treaty provides no automatic step-up for RRSP like it does for principal residence and non-registered investments deemed to be disposed of on departure?
5) So excluding the new 2009 rules, a US citizen Canadian resident who moves to US, will always pay tax in US on RRSP growth portion only, never the contributions as you outlined above. So the advantage of a non-US citizen with an RRSP is they don’t have to pay tax on any of the withdrawals in the US (growth or contributions). So it’s theoretically possible for non-US citizen to move to US, withdraw entire RRSP and only pay 25% to Canada, nothing to US? US citizen would pay 25% to Canada and report growth portion on 1040 only, taking foreign tax credit for prorated 25% (growth portion only) from Canadian side?
6) What if the roles were reversed and a US citizen made all IRA contributions as a resident of US and then moved to Canada and made a full withdrawal? I assume this would work in reverse and you would not pay any tax to Canada correct?
Thanks again!!
1, Not quite. pre-2009 401(k) is still only tax-free for CONTRIBUTIONS, not growth.
2. 2555 is NOT used on social security payments. I dod not say that Canada could not tax 401(K) more than US, I said they cannot include in income more than US does. Since US includes all the 401(k) income, canada can.
3. See 2
4. Crystallization applies only to Cdns moving to US, and thus BECOMING US taxpayers. US citizens always have been and have been deferring all along.
5. Yes. Cdns moving to US and taking their RRSP immediately after pay no tax to US on theor RRSPs. Been so for 30 years.
6. Incorrect. IRA is income in taxed in US and Canada for Cdn residents regardless of citizenship, both taxed at 100% inclusion.
The way IRS treats RRSPs is special because they say it is, not becuase Canada has a similar treatment (it doesn't). Just because IRS does a "favor", doesn;t mean Canada must.
2. 2555 is NOT used on social security payments. I dod not say that Canada could not tax 401(K) more than US, I said they cannot include in income more than US does. Since US includes all the 401(k) income, canada can.
3. See 2
4. Crystallization applies only to Cdns moving to US, and thus BECOMING US taxpayers. US citizens always have been and have been deferring all along.
5. Yes. Cdns moving to US and taking their RRSP immediately after pay no tax to US on theor RRSPs. Been so for 30 years.
6. Incorrect. IRA is income in taxed in US and Canada for Cdn residents regardless of citizenship, both taxed at 100% inclusion.
The way IRS treats RRSPs is special because they say it is, not becuase Canada has a similar treatment (it doesn't). Just because IRS does a "favor", doesn;t mean Canada must.
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1, 2 & 3. Right should have explained further. 2555 is only for wages, use 8833 for SS.
Still confused on a portion of this – in first post you mentioned that IRA and 401K are taxed same way and are all taxable in Canada EXCEPT for contributions made while a CDN resident. In your last post (1 above) you also said pre-2009 401(k) is still tax-free for contributions (assume this means only contributions while Canadian resident). Then you said Canada can include all of the income (2 above). Are you saying Canada can include the entire 15K IRA withdrawal (even though the majority of the contributions were made when Canadian resident - commuting to work in US). What am I missing?
Example 1: US Citizen with IRA – assume no growth: Made $10K of contributions while resident of US. Moved to Canada (but still worked in US via commute) and made another $10K of contributions. If resident of Canada and withdraw $20K, how much is taxed in Canada? $10K or $20K?
Example 2: Same example with growth of $10K – How much is taxable in Canada $10K, $20K or $30K?
Example 3 (applicable to 6 below): US Citizen with IRA – assume no growth: Made $20K of contributions while resident of US. Moved to Canada and withdraw $20K, how much is taxed in Canada $0 or $20K? I assume $20K
Example 4 (applicable to 4 below): Canadian citizen and resident with RRSP – assume no growth – Made $20K of contributions while resident of Canada. Moved to US and withdraw $20K, how much is taxed in US, $0 or $20K? I assume $0
4. Right, so no point to crystalize if US citizen, but if you were in Canada all of your life and plan to move to US should crystalize first. If Canadian resident entire life has $100K RRSP with ACB of $50K and move to US without crystalizing you would pay tax on $50K in US on withdrawal correct? However, if crystalize before leaving Canada, only pay tax in US on future growth over $100K correct?
5. Ok makes sense
6. Ok so works for RRSP, but not IRA (IRS offers special treatment for RRSP – no reciprocal agreement from CRA)
Asking for your patience; this has been very difficult for me to wrap my head around.
Still confused on a portion of this – in first post you mentioned that IRA and 401K are taxed same way and are all taxable in Canada EXCEPT for contributions made while a CDN resident. In your last post (1 above) you also said pre-2009 401(k) is still tax-free for contributions (assume this means only contributions while Canadian resident). Then you said Canada can include all of the income (2 above). Are you saying Canada can include the entire 15K IRA withdrawal (even though the majority of the contributions were made when Canadian resident - commuting to work in US). What am I missing?
Example 1: US Citizen with IRA – assume no growth: Made $10K of contributions while resident of US. Moved to Canada (but still worked in US via commute) and made another $10K of contributions. If resident of Canada and withdraw $20K, how much is taxed in Canada? $10K or $20K?
Example 2: Same example with growth of $10K – How much is taxable in Canada $10K, $20K or $30K?
Example 3 (applicable to 6 below): US Citizen with IRA – assume no growth: Made $20K of contributions while resident of US. Moved to Canada and withdraw $20K, how much is taxed in Canada $0 or $20K? I assume $20K
Example 4 (applicable to 4 below): Canadian citizen and resident with RRSP – assume no growth – Made $20K of contributions while resident of Canada. Moved to US and withdraw $20K, how much is taxed in US, $0 or $20K? I assume $0
4. Right, so no point to crystalize if US citizen, but if you were in Canada all of your life and plan to move to US should crystalize first. If Canadian resident entire life has $100K RRSP with ACB of $50K and move to US without crystalizing you would pay tax on $50K in US on withdrawal correct? However, if crystalize before leaving Canada, only pay tax in US on future growth over $100K correct?
5. Ok makes sense
6. Ok so works for RRSP, but not IRA (IRS offers special treatment for RRSP – no reciprocal agreement from CRA)
Asking for your patience; this has been very difficult for me to wrap my head around.
I did make a $15K withdrawal from an IRA in 2014. This is what I'm trying to figure out. The other questions were just more out of curiosity for the future. I respect your time, and realize this is your busy season. If you could just answer the two examples pertaining directly to the IRA that would be greatly appreciated? The rest I can figure out when the time comes in the future.
Example 1: US Citizen with IRA – assume no growth: Made $10K of contributions while resident of US. Moved to Canada (but still worked in US via commute) and made another $10K of contributions while resident of Canada. If resident of Canada and withdraw $20K, how much is taxed in Canada? $10K or $20K?
Example 2: Same example with growth of $10K – How much is taxable in Canada $10K, $20K or $30K?
Thanks again!
Example 1: US Citizen with IRA – assume no growth: Made $10K of contributions while resident of US. Moved to Canada (but still worked in US via commute) and made another $10K of contributions while resident of Canada. If resident of Canada and withdraw $20K, how much is taxed in Canada? $10K or $20K?
Example 2: Same example with growth of $10K – How much is taxable in Canada $10K, $20K or $30K?
Thanks again!
If you promise not to continue this thread I will answer your 2 questions:
ex 1: 20K taxed in US, 10K in Canada, because the second 10K was not deductible
ex 2: 30K taxed in US, 20K in Canada.
Bottom line, do not fund IRA when living in Canada. 401(k) maybe, but not IRA.
ex 1: 20K taxed in US, 10K in Canada, because the second 10K was not deductible
ex 2: 30K taxed in US, 20K in Canada.
Bottom line, do not fund IRA when living in Canada. 401(k) maybe, but not IRA.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing