IRA withdrawal Canadian citizen and resident

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formertnworker
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Joined: Tue Feb 04, 2014 1:49 pm

IRA withdrawal Canadian citizen and resident

Post by formertnworker »

Hi !

This post might be redundant as it this topic has several postings, but I am a little confused and thought of getting some help:

-I worked in the USA and put money in a traditional IRA there. I 've never had a green card or US citizenship.

- My IRA was left in the US until I decided to withdraw the money this year.
I am under 59 y\o and a Canadian resident.

-40% was withheld from the IRA withdrawal lump-sum payment.

From reading this blog, my understanding is the following:

for the US taxation side, I need to:

-File 1040 NR to get a refund , as the marginal tax rate of the IRA withdrawal will be quite low (IRA value was 10K)
-include form 5329 for the early withdrawal penalty of 10%

What confuses me is the withholding. I have read somewhere that ''A lump sum distribution from an IRA or 401(k) to a non-U.S. citizen, non-U.S. resident is generally subject to a U.S. 30 percent withholding tax''. Periodic payments are subject to 15% in the US-CAN tax treaty

Then you add up the 10% for early withdrawal .

Is the final tax payment to the US :

15% (US-can tax treaty) + 10% penalty = 25% of the IRA value

or

IRA distribution tax (marginal tax rate on 1040NR) + 10% penalty.


Thanks
nelsona
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Post by nelsona »

Your IRA is NOT subject to marginal rate, it is subject to FLAT tax, and 10% early penalty.
A lump sum is NOT a periodic pension payment, so is not protected by the treaty.

That said, most don't pay 30+10. they pay 15% plus 10%.

You should this :
File 1040NR put the gross IRA amount on the NEC form, at 15%, and trhe 10% on the early tax line, and see what happens.

But it is NOT regular IRA income on the front page of 1040NR.
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formertnworker
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Joined: Tue Feb 04, 2014 1:49 pm

Post by formertnworker »

I'll do that, makes sense.Thanks!
hennady
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Joined: Mon Feb 03, 2014 12:54 am

Post by hennady »

Hi,
I,m not sure that his IRA can be classified as NEC on 1040NR. I did some research and it seems only IRA interest will be NEC. The rest should be effectively connected, as the person was working in USA and all his contributions are actual USA earnings.
I do not claim that it,s ultimate truth but my impression is like that. Unless somebody saw direct IRS rule that actual ernings while in USA are NEC if a person leaves country later.
nelsona
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Post by nelsona »

Pension income is considered NEC.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
hennady
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Post by hennady »

Actually if it can be classified as "pension" and contributions were done after 1986 then it will be effectively connected income (irs instructions for 1040nr, chapter2).
Instructions for chapter with NEC describe retirement benefits that are periodic or sponsored. I.e. in other words, income obtained would not match actual contribution by the person. While IRA described contains money where each dollar was contributed by the author. Examples on IRS website separate these two cases ( everything contributed by the person vs payments are not related to contributions).
For my curiosity, nelsona, can you please tell me where you saw that IRA will become NEC regardless source of money in it?
Thank you in advance!
nelsona
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Post by nelsona »

Let me clarify and yes there is a distinction between IRA and pensions, as you said.
While Ira and pension income can be taxed gradually as connected income, treaty country residents and nationals who are not US taxpayers can elect the treaty rate for these incomes. To do this one would report them on the NEC form

So to correctmy earlier response our poster has the choice to report it as connected or nec if that is better
Note that canada is unusual in that it has a 15% pension rate; most other treaty countries are 0% and so would never report pensions on a graduated connected basis
Btw the Cdn treaty lumps the treatment of ira and pension, so any distinction between the two is removed
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
hennady
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Post by hennady »

Thank you for clarifying.
So as the author is not USA resident and has only 10k in his account would it be the most beneficial for him just to use a standard rate (not NEC), and apply personal exemptions against these 10k? It might be more beneficial that flat 15%.
nelsona
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Post by nelsona »

Well, beneficial in terms of US tax. Of course, CRA will gladly accept to take the extra.

Even lowering the tax to 25% (15% plus 10%) would help. It should never have been 40%.
The point is he needs to file 1040NR because of the wrong withholding.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
patti
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Post by patti »

This is interesting, as I did not realize that you could use the 1040NR to reduce the early IRA withdrawal tax below the flat 25% rate (15% tax + 10% penalty). For relatively low early retirement incomes, there is a risk that withdrawals from an IRA would have the flat 25% withheld, but the average Cdn rate might be below 25%. Of course this means there is double taxation. In this case filing a 1040NR could reduce the US rate and equalize the 2 country's rates at, say, 22% or so.

But here is my question: How would you handle US-sourced dividends (i.e. from U.S. based ETFs that pay dividends)? If you elect to consider your IRA distributions as effectively connected (and therefore subject to exemptions and lowest graduated tax rates of 10% and 15%), do you need to do the same for dividends? It seems to me that you would not have the appropriate US reporting to do this correctly (i.e. form 1099 which indicates qualified vs. non-qualified dividends). Or can you leave those as NEC (subject to flat rate 15% tax) so as to not bump up into the higher US tax brackets? Or can you just ignore your US dividends (that have already had the correct 15% withheld) and simply file form 1040NR with your IRA withdrawals to get a refund?
nelsona
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Post by nelsona »

Again you have the choice of page 1 or NEC for that income
But I would not leave it off of my 1040nr
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
patti
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Post by patti »

The more I think about it, it would not make sense to leave dividend income off the 1040nr. As a matter of fact, it seems to me that both IRA withdrawals and US sourced dividends should both be included as effectively connected income on page 1 (given that there is a choice). Since we are talking about a low income early retiree, the connected dividends (assuming they are qualified would attract either a 0% or 15% rate.... so no more than standard NEC withholding rates.
nelsona
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Post by nelsona »

Folks, let's not get carried away with what "effectively connected" means.

Dividends paid to you by a US corporation are NOT effectively connected. Why? Becuase "effectively connected" is a shortened form of "effectively connected to a trade or business in which YOU are engaged".

http://www.irs.gov/Individuals/Internat ... come-(ECI)

http://www.irs.gov/publications/p519/ch ... 1000222308

Owning/trading stocks is not an engaging in a trade or business in US.

Dividends that would be ECI are, for example, if you do self-employed work in US, and instead of salary your company pays you a dividend.

THAT is ECI. Dividends from holding GM stock is not.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
patti
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Post by patti »

Nelsona - Perhaps I misinterpreted your statement "Again you have the choice of page 1 or NEC for that income"

In actuality, you only have a choice regarding IRA distributions. If you are in a low income early retirement situation and need to bring the effective US rate down to avoid double taxation, you could put those IRA distributions on page 1 (to take advantage of exemptions and the 10% federal bracket). On the other hand, the US sourced dividends have to go as NEC income.

Seems to me this strategy still makes sense if it lowers the average US rate a couple percent to bring it below the average Canadian rate.
nelsona
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Post by nelsona »

Indeed, when I said "Let's not get carried away with what effectively connected income is" I was including myself: Let US not.

I would definitely agree that company pensions are page 1 items, if you bother filing.
And *some* of the income form IRA retirement accounts related to work done in US as well.
But not all IRA income, and not inherited IRAs, and not brokerage account dividends.

The issue is whether most Cdns want to be bothered with filing 1040NR if their IRA/pension is being correctly withheld.

Which highlights the need to have all one's paperwork with US retirement account manager on file: W-8BEN, etc.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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