Canadian resident contributed to a Roth...big mistake?

[markitzero]

In 2008-2010 I was working in the US, but claiming Canadian residency for tax purposes (based on a closer-connection test.) During those years, I made approx $40,000 in payroll deduction contributions to my US employer's-sponsored Roth IRA, an account that's now worth approx $50,000.

Was that as big as screwup as I think it was? From my research, it seems like Canadian citizens ARE allowed to have a Roth IRA (if they live/work in the US, for example), but the moment they make a "Canadian Contribution", the special Roth provisions are 'broken'...(is my understanding correct so far?

In the situation I described in the first paragraph, however, it seems like EVERY ONE OF my payroll deductions would have qualified as a "Canadian Contribution"...because I was claiming Canadian residency for tax purposes, is that right?

If that's the case, is my understanding of the following correct:
i) I should have been reporting the accruals in my Roth IRA on my Canadian tax returns (I did not)
ii) if (i) above is correct, then even though I thought I was technically contributing to a Roth IRA, I was never actually getting the tax benefits of it (or at least I wouldn't have, had I been properly reporting.)
iii) But most troubling: I'm now essentially left with a $50,000 Roth IRA account that provides absolutely no tax benefits, but WHICH I CAN'T ACCESS WITHOUT INCURRING A 15% PENALTY (assessed by the IRS, since that's how Roth IRAs work in the US).

QUESTIONS:

1) Am I understanding the situation properly, and is there anything I can do about it now?

2) At what point of the process would a reasonable person even have been made aware that the retirement plan being pitched to him by his employer's retirement specialist was actually a one-way ticket to nowhere (i.e. NOT getting the tax benefits on accruals, AND also having that money inaccessible, without paying a 15% penalty!??)

3) Just which portion of the Roth accrual is taxable...only the $10,000 increase in value, right? But what if I never actually REALIZED any gains within the Roth? In other words, my payroll-deduction just purchased units of mutual funds...but i never SOLD any of those funds...so even though they appreciated $10K in value, would that have led to any tax liability to the CRA?

[nelsona]

i) yes, you should have been reporting the growth.

ii) there are immedaite no tax benefits to contributing to a Roth or Roth401k. The benefits come from the tax-exemt income it generates.

iii) correct.

1. Yes. You should report the income until you can collapse the Roth. Rememebr that you can ALWAYS take out the contribution portion tax and penalty-free, which I would do immediately.

2. I had always counselled against Roths, even for those possiblt b=returning to Canda (until the new protocol was signd). For Cdn residents this was never a viable option. One has to educate themeselves.

[markitzero]

[quote="nelsona"]i) yes, you should have been reporting the growth.

ii) there are immedaite no tax benefits to contributing to a Roth or Roth401k. The benefits come from the tax-exemt income it generates.

iii) correct.

1. Yes. You should report the income until you can collapse the Roth. Rememebr that you can ALWAYS take out the contribution portion tax and penalty-free, which I would do immediately.

2. I had always counselled against Roths, even for those possiblt b=returning to Canda (until the new protocol was signd). For Cdn residents this was never a viable option. One has to educate themeselves.[/quote]

Thanks for the reply.

re: (ii), yes, I knew there were no immediate tax benefits to contributing to the Roth (since it was post-tax dollars), but my point was just that I wasn't even getting the tax-free growith it generates (which you confirmed.)

re: (1) I actually didn't know that I could take out the contribution-portion tax-free (although that makes sense since I've already paid tax on it.)

- what do you mean when you refer to "collapsing" the Roth?
- re: my 3rd question from my OP, why is tax due on the increase in value if I haven't actually REALIZED any of it? IOW, I bought $40,000 worth of mutual funds, which have since appreciated to $50,000...why is tax due on the $10,000 increase in value? If those were just regular mutual funds I'd bought with cash in my bank account, I wouldn't owe any tax on the appreciation in value, right? So why is there tax owing simply because they're in a Roth IRA?

[nelsona]

Please don't use the quote feature, it does not work, and I'm well aware of what I write.

As it stands, it is pointless to keep the Roth long-term, so, you should as soon as possible, take as much money out tax and paeanlty free, and look for a good time to get rid of it all. That would be a collapse of the Roth, no?

I cannot read your account statement. If you say the plan has grown, I have no idea if it is realized gain or not. if it is not, then you do not owe any Cdn taxes on the growth. Most Mutuals make annual distributions, there ARE taxable in canada year after year unless shelterd, which yoiur roth is not.

The moment you sell any of theese funds of course, you trigger any unrealized gains.

The IRS penalty btw is 10%, not 15. It may make tax sense for you to collapse the Roth, pay the 10% tax on the growth, and use that tax towards your Cdn cap gains tax on the whole mess. If these work out even, then it is as if you simply had a regular trading account. No harm no foul.