Canadian resident for entire life and I emigrate to the US. Can I “crystalize†the gain in my LIRA (former defined CONTRIBUTION pension plan) account before I go (by making a fund switch) like I can for an RRSP? I understand if done correctly for an RRSP, I would only pay tax to the US on future growth AFTER becoming a US resident. I assume this “trick†also works for both 1) a LIRA and 2) Defined CONTRIBUTION pension plan?
On the other hand, does the crystallizing â€trick†work if I have a defined BENEFIT plan pension and don’t take the commuted value and convert it to a LIRA; but take the monthly pension income instead? In other words, is there a way to “bump-up or crystalize†the gains inside a defined BENEFIT pension plan like there is with a LIRA, defined CONTRIBUTION plan or RRSP?
I assume no because 1) If you are still employed you can’t make any changes to the investments in a defined BENEFIT plan (it’s the employer’s responsibility to manage the investments) like you can in a defined CONTRIBUTION plan (it’s your responsibility to manage the investments) and 2) If you are retired and already receiving your pension, there is nothing you can do with it at this point because it’s basically an annuity.
I’m also aware how 401K’s and IRA’s are taxed in Canada (portion for contributions made while resident of Canada that you did not get deductions for is tax free on withdrawal – as long as you grossed up wages on Canadian side). However, I’m assuming a US pension is fully taxable in Canada and vice versa. In other words, there is no potential for reduced taxation for some of the contributions from a pension or annuity like there is for 401K’s, IRA’s, LIRA's defined CONTRIBUTION plans and RRSP’s?
Can anyone confirm if this is correct?
LIRA and Defined Contribution Pension on Departure
Moderator: Mark T Serbinski CA CPA
LIRAs, because they are employer-funded, have no "investment basis" for US tax purtposes 9even if you made contributions), so are 100% taxable upon withdrawal. No point crystallizing.
Same for defined benefit palns.
Same for defined benefit palns.
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Thanks so much for the quick response. That sucks that the IRS discriminates between an RRSP and LIRA, but I suppose this makes sense because your employer contributed to the plan as well. So just to confirm another point, aside from the fact that you can’t crystallize the gain in a LIRA, does this also mean that the IRS does not recognize the EMPLOYEE contributions you made to a LIRA while living in the US (commuting to Canada to work); like CRA does for EMPLOYEE contributions made to a 401K while living in Canada commuting to the US (that were not deducted and were grossed up on the T1 General)? In other words, is the LIRA 100% taxable in the US; even the employee contributions you made while living in US that were not deducted on the US side (pre 2009)?
If you live in Ontario, FSCO allows you to unlock the funds in a LIRA and transfer them to an RRSP (regardless of your age) after you have been a non-resident of Canada for two years. I suppose crystallizing at this point, wouldn’t help you because you already left Canada right? Ontario also allows you to unlock 50% of a LIF within the first 60 days of the contract being established and transfer it to an RRSP (if you are 55 or older). So I suppose you could transfer your LIRA to a LIF, unlock 50%, transfer it to an RRSP and at least crystallize 50% before you leave. They also have a small account unlocking provision that allows you to unlock amounts in a LIRA/LIF if they are less than $21,440 (if you are 55 or older). So I suppose if your LIRA is small enough ($42,880 or less), you could use the 50% LIF unlocking feature, and if the remaining amount is less than $21,440 you can unlock the residual and transfer this amount to your RRSP as well and then crystalize the entire $42,880 before you leave.
So to summarize, crystallizing basically only works for RRSP’s and RRIF’s right? Anything else in either the US or Canada?
If you live in Ontario, FSCO allows you to unlock the funds in a LIRA and transfer them to an RRSP (regardless of your age) after you have been a non-resident of Canada for two years. I suppose crystallizing at this point, wouldn’t help you because you already left Canada right? Ontario also allows you to unlock 50% of a LIF within the first 60 days of the contract being established and transfer it to an RRSP (if you are 55 or older). So I suppose you could transfer your LIRA to a LIF, unlock 50%, transfer it to an RRSP and at least crystallize 50% before you leave. They also have a small account unlocking provision that allows you to unlock amounts in a LIRA/LIF if they are less than $21,440 (if you are 55 or older). So I suppose if your LIRA is small enough ($42,880 or less), you could use the 50% LIF unlocking feature, and if the remaining amount is less than $21,440 you can unlock the residual and transfer this amount to your RRSP as well and then crystalize the entire $42,880 before you leave.
So to summarize, crystallizing basically only works for RRSP’s and RRIF’s right? Anything else in either the US or Canada?
Even if you were to convert a LIRA to an RRSP. that would not make any of it non-taxable. Its not whether it is a LIRA or an RRSP it is whether IRS recognizes any of it and "investment" in the contract.
For employer-sponsor retirement accounts, by IRC 72(w) neither the employee nor employer portion, nor the growth, constitute "investment", unless the employee contribution was included on a 1040. None of the scenarios you describe would create non-taxable "investment" in the RRSP.
So, in your case that a US commuter (or simply a US citizen living in Canada)would be part of a sponsored plan, the amount that he included on 1040 would be non-taxable at some point. But to elect to do this would bring a tax mismatch between the year of the contribution (taxed in US) and the years of the withdrawal (taxed in Canada), so not something one would elect to do.
For employer-sponsor retirement accounts, by IRC 72(w) neither the employee nor employer portion, nor the growth, constitute "investment", unless the employee contribution was included on a 1040. None of the scenarios you describe would create non-taxable "investment" in the RRSP.
So, in your case that a US commuter (or simply a US citizen living in Canada)would be part of a sponsored plan, the amount that he included on 1040 would be non-taxable at some point. But to elect to do this would bring a tax mismatch between the year of the contribution (taxed in US) and the years of the withdrawal (taxed in Canada), so not something one would elect to do.
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Thanks for the great info! My thinking was that the income somehow gets “re-characterized†when it’s converted from a LIRA to an RRSP and therefore would qualify for crystallization. Much like what happens when you convert a 401K to an IRA and subsequently transfer the funds to your RRSP. My understanding is you can transfer the EMPLOYEE contributions that you make to a 401K to your RRSP in Canada without using any RRSP contribution room, but not the employer contributions. The way around this is to first transfer the 401K to an IRA (which “re-characterizes†the income) and then transfer the entire IRA to your RRSP without using any RRSP contribution room. I was thinking maybe this same logic applied in the LIRA/RRSP scenario.
You bring up an excellent point about the timing mismatch for foreign tax credit purposes. If I’m a US citizen and resident of Canada when I make the withdrawal from the LIRA, it really doesn’t help me by electing not to be taxed on the pre 2009 employee portion in the US; because the entire amount is taxed in Canada anyway and Canada has higher tax rates.
What if I’m a US citizen living in Canada, commute to work in US and have pre 2009 contributions to a 401K (as I described in my last post)? In this case is there a small advantage (because Canada’s tax rates are generally higher than US rates) of electing not to have CRA tax me on the employee contributions to the 401K made while I was resident of Canada?
Assume tax rate in Canada is 30% and 20% in US. Withdraw $10K, 100% taxable in US and only 50% taxable in Canada. Tax to US is $2000 ($10K*20%) and tax to CRA is $500 ($5K*30% = $1500 - $1000 prorated US FTC) for a combined total of $2500 in US and CAN. If instead I include 100% in Canada, tax to CRA would be $1000 ($10K*30% = $3000 - $2000 US FTC) and tax to US would remain $2000; for a combined total of $3000 in US and CAN. So $2500 total tax if I exempt a portion vs. $3000 if I don’t. Does this sound about right?
You bring up an excellent point about the timing mismatch for foreign tax credit purposes. If I’m a US citizen and resident of Canada when I make the withdrawal from the LIRA, it really doesn’t help me by electing not to be taxed on the pre 2009 employee portion in the US; because the entire amount is taxed in Canada anyway and Canada has higher tax rates.
What if I’m a US citizen living in Canada, commute to work in US and have pre 2009 contributions to a 401K (as I described in my last post)? In this case is there a small advantage (because Canada’s tax rates are generally higher than US rates) of electing not to have CRA tax me on the employee contributions to the 401K made while I was resident of Canada?
Assume tax rate in Canada is 30% and 20% in US. Withdraw $10K, 100% taxable in US and only 50% taxable in Canada. Tax to US is $2000 ($10K*20%) and tax to CRA is $500 ($5K*30% = $1500 - $1000 prorated US FTC) for a combined total of $2500 in US and CAN. If instead I include 100% in Canada, tax to CRA would be $1000 ($10K*30% = $3000 - $2000 US FTC) and tax to US would remain $2000; for a combined total of $3000 in US and CAN. So $2500 total tax if I exempt a portion vs. $3000 if I don’t. Does this sound about right?
You are incorrest on the 401(k) transfer process. there is no separate treatment of what was contriburted, growth, etc. All 401(k) transfer (actaully it must first be put in an IRA) is eligile for transfer without impacting contribution room. the only dostinction is that the IRA must have been work-related, and not an inherited IRA from a parent, etc.
I would stop looking for analogies between each system. First, there are none. Second, you are instilling misconceptions in your ideas.
as to previously taxed 401(k0 contributions. there exemption for future Cdn taxation isn't an "election". It simply isn't taxable. Anything that reduces your Cdn income is agood thing. Running numbers is meaningless at this point.
I would stop looking for analogies between each system. First, there are none. Second, you are instilling misconceptions in your ideas.
as to previously taxed 401(k0 contributions. there exemption for future Cdn taxation isn't an "election". It simply isn't taxable. Anything that reduces your Cdn income is agood thing. Running numbers is meaningless at this point.
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I do not believe I’m incorrect on this process. I have read numerous sources on this topic and all of them indicate that only employee contributions from 401K’s can be transferred directly to an RRSP without using RRSP contribution room. However, if you transfer the 401K to an IRA first; you can then transfer both employee and employer contributions from the IRA without using RRSP room. In other words, the employer contributions are “re-characterized†when transferred to the IRA. This is why I mentioned it, but as you pointed out this same logic does not apply to a transfer from a LIRA to an RRSP. However, I suppose in practice, if a LIRA has been unlocked, transferred to an RRSP and crystallized, it would be hard for the IRS to link the origin of the original investment back to the LIRA (this would all take place before moving to the US). Not that I would ever suggest trying this. I agree that there are many inconsistencies between the two systems; I’m trying my best to understand them. Here is a link discussing the 401K issue. I also have some very credible PDF’s on this subject, but this site does not allow me to attach them.
http://www.advisor.ca/images/other/ae/a ... moveit.pdf
I understand that it’s not an election. You said “But to elect to do this would bring a tax mismatch†in your last post, so I continued to use this language in my previous post.
So numbers aside, the bottom line is if you can eliminate any tax in the higher tax jurisdiction, this is normally beneficial; eliminating tax in the lower jurisdiction is generally futile. Thanks again for your comments, this was helpful. I appreciate your patience.
http://www.advisor.ca/images/other/ae/a ... moveit.pdf
I understand that it’s not an election. You said “But to elect to do this would bring a tax mismatch†in your last post, so I continued to use this language in my previous post.
So numbers aside, the bottom line is if you can eliminate any tax in the higher tax jurisdiction, this is normally beneficial; eliminating tax in the lower jurisdiction is generally futile. Thanks again for your comments, this was helpful. I appreciate your patience.
The only reliable source for the rules on making this transfer is CRA itself, which explained in great detail the process.
The advisor.ca pamphlet is quite simply incorrect on this. Other errors include the ability to carry forward US tax as a credit for seven years. This is not possible for non-business income (its now ten years for business income).
http://garygauvin.com/WebDocs/CCRA/IRAs2RRSPs.pdf
http://www.garygauvin.com/WebDocs/CCRA/RevCan_IRA.pdf
Btw, the 10% penalty which arises from maiking this withdrawal before 59 1/2 s now considered eligible for the credit At the writing of thses memeos, the CRA would not allow the penalty to be included.
So, reading lots of info is not exclusive.
As to what is an "election", the decision to deduct 401(k) contributions on your return is indeed an election on your part, since 2009. However once you have elected not to deduct the contribution (or before 2009, were not permitted to deduct it) the fact that that contribution is non-taxable is just that, a fact, not an election.
The advisor.ca pamphlet is quite simply incorrect on this. Other errors include the ability to carry forward US tax as a credit for seven years. This is not possible for non-business income (its now ten years for business income).
http://garygauvin.com/WebDocs/CCRA/IRAs2RRSPs.pdf
http://www.garygauvin.com/WebDocs/CCRA/RevCan_IRA.pdf
Btw, the 10% penalty which arises from maiking this withdrawal before 59 1/2 s now considered eligible for the credit At the writing of thses memeos, the CRA would not allow the penalty to be included.
So, reading lots of info is not exclusive.
As to what is an "election", the decision to deduct 401(k) contributions on your return is indeed an election on your part, since 2009. However once you have elected not to deduct the contribution (or before 2009, were not permitted to deduct it) the fact that that contribution is non-taxable is just that, a fact, not an election.
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You might want to look at:
http://www.advisor.ca/tax/estate-planni ... sfers-2781
Here bezaitre corrects much of what she wrote in your reference, removing any distinction between employer and employee funds, and correcting the notion that credit dould be carried forward, it cannot.
There is a further adjustment on the penalty back in 2012, when CT+RA changed their policy on penalties as tax.
And the vast majority of advisors (and CRA) insist that the funds must be put in an IRSA first.
http://www.advisor.ca/tax/estate-planni ... sfers-2781
Here bezaitre corrects much of what she wrote in your reference, removing any distinction between employer and employee funds, and correcting the notion that credit dould be carried forward, it cannot.
There is a further adjustment on the penalty back in 2012, when CT+RA changed their policy on penalties as tax.
And the vast majority of advisors (and CRA) insist that the funds must be put in an IRSA first.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Thanks so much for the clarification. I noticed the error on the foreign tax credit carryforward as well; which of course decreases the credibility of the article. I do have a PDF from Manulife Financial’s tax department and a PDF from a cross border tax course I took in 2012 from The Knowledge Bureau that says 401K employer contributions can’t be transferred directly without using RRSP room (author is Angela Preteau). There’s just so much misinformation out there it’s hard to find some credible sources. If you would like I can send them to you? Is there a way I can attach them to this post or send them to you another way?
This Sunlife article touches on this issue a bit as well, but kind of skirts around it (towards the end page 15 or 16 I think). I’m guessing you have already read this.
https://www.sunnet.sunlife.com/files/ad ... o_RRSP.pdf
Yes I’m aware of the 10% penalty now being eligible as a credit as well, thanks for pointing this out. I think US estate tax is now eligible for a credit as well, is it not?
Ok now I get what you are saying on the election part, thanks for clarifying. Agreed!
So I suppose at the end of the day, the bottom line is just transfer the 401K to an IRA first and don’t worry about the 401K rule and transferring it directly to an RRSP. This eliminates any doubt. If the rule that only employee contributions from a 401k can be transferred directly to an RRSP is in fact correct, in almost all cases, the employer would have contributed to the plan and therefore require you to transfer the 401K to an IRA first anyway.
I really appreciate you taking the time to clear this up for me. Have a great thanksgiving!! Assuming you live in Canada lol
This Sunlife article touches on this issue a bit as well, but kind of skirts around it (towards the end page 15 or 16 I think). I’m guessing you have already read this.
https://www.sunnet.sunlife.com/files/ad ... o_RRSP.pdf
Yes I’m aware of the 10% penalty now being eligible as a credit as well, thanks for pointing this out. I think US estate tax is now eligible for a credit as well, is it not?
Ok now I get what you are saying on the election part, thanks for clarifying. Agreed!
So I suppose at the end of the day, the bottom line is just transfer the 401K to an IRA first and don’t worry about the 401K rule and transferring it directly to an RRSP. This eliminates any doubt. If the rule that only employee contributions from a 401k can be transferred directly to an RRSP is in fact correct, in almost all cases, the employer would have contributed to the plan and therefore require you to transfer the 401K to an IRA first anyway.
I really appreciate you taking the time to clear this up for me. Have a great thanksgiving!! Assuming you live in Canada lol
Personally, unless you have a 401(k) that is less than $50-60K, I would not bother with the transfer. since you need a good chuck of other income to cover the tax credit, and you need even more of a chunk of ready available cash to make up fir the withheld tax.
Cdn dealers like to talk about this of course, because its the only way they can get their hands on that investment money. Its fine to leave it in US.
And if my account was only $50-60K, I would instead by changing it to a roth, not an RRSP.
I don't need any more misinformation, thanks.
Cdn dealers like to talk about this of course, because its the only way they can get their hands on that investment money. Its fine to leave it in US.
And if my account was only $50-60K, I would instead by changing it to a roth, not an RRSP.
I don't need any more misinformation, thanks.
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Yes I tend to agree with you. There are definitely a lot of firms trying to get their hands on the US money. It’s a fairly common conversation in the circle of professionals in this area. I’m from a border town, so probably more so because of this.
Yeah, a lot of the times if the account is large, you can’t even do it in one transfer because of the need for a corresponding amount of income on the Canadian side to absorb all of the foreign tax credits (as you mentioned they can’t be carried forward); not to mention the cash flow problem which you alluded to. From reading your other posts, I know you’re not really a big fan of this idea. I tend to think the only real advantage is it simplifies things a bit (not having investments in two countries, etc), but like you, I’m not a huge fan.
I’ve also read many of your posts about your Roth IRA idea and tend to like this concept quite a bit. Your only requirement on the Canadian side would be to file an annual election with your Canadian return to defer the growth in the account correct? Much like the old 8891 forms in the US?
http://www.jamiegolombek.com/articledet ... cle_id=815
What I can’t seem to find is if this same annual election to defer tax is required for a 401K or an IRA. I checked the Canadian tax code up and down and they don’t seem to acknowledge it anywhere, just the ROTH IRA.
Yeah, a lot of the times if the account is large, you can’t even do it in one transfer because of the need for a corresponding amount of income on the Canadian side to absorb all of the foreign tax credits (as you mentioned they can’t be carried forward); not to mention the cash flow problem which you alluded to. From reading your other posts, I know you’re not really a big fan of this idea. I tend to think the only real advantage is it simplifies things a bit (not having investments in two countries, etc), but like you, I’m not a huge fan.
I’ve also read many of your posts about your Roth IRA idea and tend to like this concept quite a bit. Your only requirement on the Canadian side would be to file an annual election with your Canadian return to defer the growth in the account correct? Much like the old 8891 forms in the US?
http://www.jamiegolombek.com/articledet ... cle_id=815
What I can’t seem to find is if this same annual election to defer tax is required for a 401K or an IRA. I checked the Canadian tax code up and down and they don’t seem to acknowledge it anywhere, just the ROTH IRA.