Divesting a pension

[CdnAmerican]

Hi all - I've asked about this a long time ago hypothetically, but now have an actual situation. I haven't seen a post that addresses this directly, though I might be missing one.

I'm a USC in Canada, about 20 years from retirement with no imminent return to the USA on the horizon. I am leaving a job which will allow me to divest a pension plan with roughly C$30K cash available and roughly C$75K to go into a LIRA. Alternately, I can of course keep the pension intact. Most colleagues seem to leave the pension intact, but my wife (also a USC) and I are both fairly heavily into this plan and I would prefer to diversify (basically, I don't trust the pension plan to invest the money well, and think I could get a better ROI myself).

My inclination is to put the $30K cash directly into an RRSP so I have no Cdn tax exposure; I can claim that $30K as income in the US and probably won't go above the threshold for paying any tax on it (I probably won't make enough money in 2016 for that to happen).

My initial questions are:
a) Do I have this procedure right (e.g., am I missing something really basic, like exposing myself to US tax on the $75K), and
b) Is this a wise idea? (that is, do I expose myself to more US tax in the future via a LIRA/RRSP versus a regular pension)?

Thanks in advance!

[nelsona]

1. Looks alright. Remember that none of these monies will be tax exempt in US. It is all taxable when you take it out. The RRSP that you create with the 30K will not be taxable in US (the growth will) but the RRSP will be taxable in Canada. The LIRA will be fully taxable in both countries.
2. Leaving it as a pension will ensure 15% Cdn withholding. RRSP would need to be converted to RRIF to get 15%, and along with LIRA withdrawal would have to meet the requirements for 15%, otherwise it will be 25% withheld. The US taxation won't change: all of these funds will be taxable when received.

[CdnAmerican]

Thanks nelsona! Just a clarification question; When you say that 'it's taxable when I take it out', do you mean that it's taxable as soon as I set up the LIRA, or that it's taxable when I actually withdraw it for my personal use (after retirement)? I assume it's the latter but want to make sure.

Your point about 15% tax vs. potentially higher is a compelling one. It is a less appealing option if I wind up paying 10% more tax on it in Canada. I had not thought of that and should look into it further to see if I am at risk for the higher tax (I suspect I am). Thanks for the info!

[nelsona]

Slight clarification on #1. The funds that you take out now will be taxable in US now, the FUTURE taxation of the RRSP that you then plan to contribute to to will only be taxed on growth.
The lira that you create directly will only be taxable later in US and Canada.

[CdnAmerican]

Excellent. Thanks very much for your help!