Hi,
I'm leaving the US for Canada in mid-september 2007. I will buy a house in Canada in 2008.
I have around 18 000$ USD in a 401k plan. I'd like to transfer that money in my spouse RRSP so that she can use it as part of the HBP. I have already 20 000$ in my own RRSP that I can use for the HBP. My spouse is a CND citizen too.
Questions:
- I read that there is no 10% penalty if you withdraw from an IRA for a first house purchase. Would that apply for a canadian resident? How would that work?
- If want to transfer the 401k/IRA withdrawal directly to my spouse RRSP, will that reduce my unused RRSP contribution or is it not taken into account (i.e. I keep them)?
- I know that the IRS will withhold at least 20% (+ penalty) from that 401k/IRA withdrawal. Can I still get the foreign tax credit if I contribute to my spouse RRSP instead of mine?
Thanks a lot,
jeff
Using 401k for HBP
Moderator: Mark T Serbinski CA CPA
Lots of issues. First, to make any IRA to RRSP 'migration' (since there is no clean transfer process), the 401(k) has to be made into an IRA (pretty simple).
This is good, since only IRAs are eligible for forgiveness of the early withdrawl penalty (only $10,000 is eligible for this, and you can't have had a house for 2 years before). This would apply wherever the house is bought.
So, on the withdrawal of your $18,000 you are looking at $800 in penalties, plus whatever IRS tax you determine on your 1040NR. let's say $3000. You would also add this entire withdrawal to your Cdn tax return. The $800 penalty would not be used as foreign tax credit, but regular tax would. Proabaly 30% would have been withheld from the proceeds, so you would have say $14000 in your hands. You'll iron out the fianl tax numbers in the spring on your 1040 or 1040NR.
You can then put $18,000 in an RRSP (you would need to make up the $4000 you had withheld). It must be YOUR RRSP however, not hers, not a spousal one either, so that kills any idea about HBP. This ammount would affect your contribution room, as it is not considered an RRSP contribution, but a transfer. Whatever ammount you did put into the RRSP would be deductible on your Cdn return.
So, you got 3 problems:
1 maybe simple: move the 4019K) to an IRa (be aware that there can be difficulties doing this while living in Canada, you may need to arrnge this before returrning.
2. You need to earn at least a good $50,000 next year to ensure that you get back the IRS tax you pay as a credit on your Cdn return.
3. The biggest problem is that all this manoevering will not get $20,000 into an RRSP in your spouse's name. It will all be yours.
4. You will be out $800 (at least) in penalties. which probaly defeats any advantage in even trying HBP.
So, best advice would be to get $20,000 into her RRSP the 'usual' way, either by her contributing toher RRSP or you contributing to a spousal, then doing HBP, and leaving your US pension where it is.
This is good, since only IRAs are eligible for forgiveness of the early withdrawl penalty (only $10,000 is eligible for this, and you can't have had a house for 2 years before). This would apply wherever the house is bought.
So, on the withdrawal of your $18,000 you are looking at $800 in penalties, plus whatever IRS tax you determine on your 1040NR. let's say $3000. You would also add this entire withdrawal to your Cdn tax return. The $800 penalty would not be used as foreign tax credit, but regular tax would. Proabaly 30% would have been withheld from the proceeds, so you would have say $14000 in your hands. You'll iron out the fianl tax numbers in the spring on your 1040 or 1040NR.
You can then put $18,000 in an RRSP (you would need to make up the $4000 you had withheld). It must be YOUR RRSP however, not hers, not a spousal one either, so that kills any idea about HBP. This ammount would affect your contribution room, as it is not considered an RRSP contribution, but a transfer. Whatever ammount you did put into the RRSP would be deductible on your Cdn return.
So, you got 3 problems:
1 maybe simple: move the 4019K) to an IRa (be aware that there can be difficulties doing this while living in Canada, you may need to arrnge this before returrning.
2. You need to earn at least a good $50,000 next year to ensure that you get back the IRS tax you pay as a credit on your Cdn return.
3. The biggest problem is that all this manoevering will not get $20,000 into an RRSP in your spouse's name. It will all be yours.
4. You will be out $800 (at least) in penalties. which probaly defeats any advantage in even trying HBP.
So, best advice would be to get $20,000 into her RRSP the 'usual' way, either by her contributing toher RRSP or you contributing to a spousal, then doing HBP, and leaving your US pension where it is.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Thanks for the info.
I'm married... From what I read on the IRS web site, each spouse can withdraw from IRA 10 000$ without penalty for their first house. We never bought any house so we would be eligible.
Also, I have a lot of unused RRSP contributions... If instead of doing a "transfer", I simply use my unused RRSP contributions to contribute to a spouse RRSP, would that work? I would loose those unused contributions but I can live with that...
Thx
jeff
I'm married... From what I read on the IRS web site, each spouse can withdraw from IRA 10 000$ without penalty for their first house. We never bought any house so we would be eligible.
Also, I have a lot of unused RRSP contributions... If instead of doing a "transfer", I simply use my unused RRSP contributions to contribute to a spouse RRSP, would that work? I would loose those unused contributions but I can live with that...
Thx
jeff
I think it would have to be 10,000 from Each spouse's IRA, not 20K from one, so you would still have penaly to pay. since your spouse doesn't have an IRA, no $10,000 from her.
IRS:
If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.
In your case YOU are receiving all the distributions. Your spouse does not receive anything from your IRA.
Putting your own money is a spousal is what I suggested. You are no longer doing a transfer at this point, so you are giving up future tax deductions, if you use the withdrawn pension money to fund spousal. Why not just fund the spousal and leave your US pension alone.
Let's forget about the US angle for a moment. Say you have $40K in an RRSP (which is basically what you have now). Would you take 10K out of it, pay tax, and then put $10K in your wifes spousal RRSP? i doubt that you would do it and give up the contribution room. I doubt even more if you found out that you would not get the full deduction on what you put in the spousal, and you paid extra tax on the withdrawal.
Just for the 'privilege' of putting $10K more on your downpayment, and have to repay your RRSP?
You can always get a loan for a house, but you can't get a 'pension loan' can you.
If your goal is to free up the 401(k) money, then go ahaed. Kinda wasted your time putting it in in the first place, so that you could take it out and pay a penalty, though.
IRS:
If both you and your spouse are first-time homebuyers (defined later), each of you can receive distributions up to $10,000 for a first home without having to pay the 10% additional tax.
In your case YOU are receiving all the distributions. Your spouse does not receive anything from your IRA.
Putting your own money is a spousal is what I suggested. You are no longer doing a transfer at this point, so you are giving up future tax deductions, if you use the withdrawn pension money to fund spousal. Why not just fund the spousal and leave your US pension alone.
Let's forget about the US angle for a moment. Say you have $40K in an RRSP (which is basically what you have now). Would you take 10K out of it, pay tax, and then put $10K in your wifes spousal RRSP? i doubt that you would do it and give up the contribution room. I doubt even more if you found out that you would not get the full deduction on what you put in the spousal, and you paid extra tax on the withdrawal.
Just for the 'privilege' of putting $10K more on your downpayment, and have to repay your RRSP?
You can always get a loan for a house, but you can't get a 'pension loan' can you.
If your goal is to free up the 401(k) money, then go ahaed. Kinda wasted your time putting it in in the first place, so that you could take it out and pay a penalty, though.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
I agree with you it would stupid to not get the tax benefits if I contribute to my spouse RRSP...
So, I should keep the IRA money for me...
However, suppose I withdraw 20 000$ from my own RRSP under the HBP plan. At the same time, I withdraw 18 000$ from my IRA where I loose 800$ because of the penalty (800$ because first 10 000$ is for my house).
Can I then use this transfer to my RRSP to be counted as an HBP repayment? I would only have a 2000$ HBP repayment left after this... Also, can I do this in the same fiscal year as HBP withdrawal?
Thx,
jeff
So, I should keep the IRA money for me...
However, suppose I withdraw 20 000$ from my own RRSP under the HBP plan. At the same time, I withdraw 18 000$ from my IRA where I loose 800$ because of the penalty (800$ because first 10 000$ is for my house).
Can I then use this transfer to my RRSP to be counted as an HBP repayment? I would only have a 2000$ HBP repayment left after this... Also, can I do this in the same fiscal year as HBP withdrawal?
Thx,
jeff
This wouldn;t work either, since the HBP repayment is not tax deductible, so you would be adding the IRA to your Cdn income, with no deduction. so you would be out the tax you paid on the $18,000, plus the penalty. Even the transfer is better than that.
As I said, if you want to do this 401(K) colllapse just to get it out of US do it. You will save $1000 on penalties. And if you want to transfer this to your RRSP, great. This wil get you some of the IRS tax back in the form of tforeign tax credit.
But forget about tying it to your or your spous'e HBP. It's not worth the hassle. The HBP is just not that great a deal to screw up your RRSP/IRA/Pension.
As I said, if you want to do this 401(K) colllapse just to get it out of US do it. You will save $1000 on penalties. And if you want to transfer this to your RRSP, great. This wil get you some of the IRS tax back in the form of tforeign tax credit.
But forget about tying it to your or your spous'e HBP. It's not worth the hassle. The HBP is just not that great a deal to screw up your RRSP/IRA/Pension.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best