Optimal time to withdraw from RRSP

[btaylor70]

Any withdrawals from RRSP has a non-resident withholding tax of 25%. I understand it can be reduced to 15% by converting it to RRIF and making periodic withdrawals. What is the right way to think about withdrawals? Do the following options make sense or are there other ones. Which option is likely to be optimal in most circumstances.

1. Option 1 - Withdraw Now. Pay 25% to CRA. Income reported to IRS will be appreciation of RRSP since leaving Canada. Pay IRS at marginal rate. Claim FTC to the extent of tax paid to IRS on appreciation. 25% CRA tax is likely to be much greater than tax owed on appreciation to IRS case (because fewer years in the US), carry forward the difference to offset against future foreign income - which in most cases will remain unused. Reinvest proceeds in taxable account, assuming minimal or no dividend and only capital gains (likely 15%)

2. Option 2 - Withdraw much later. Pay 25% to CRA. CRA tax itself will be high due to compounding. On top of it US appreciation will also be significant. Likely to pay IRS on top of 25% because of US appreciation putting the effective tax rate at much higher than 25%.

3. Option 3 - Wait until the marginal tax on US appreciation is equal to 25% of RRSP value. This way the full payment of 25% to CRA can be offset by FTC

4. Option 4 - Convert to RRIF and draw periodic payments This is in a way similar to Option 2 except at a lower tax to CRA.



PS: I understand I can take income deduction instead of FTC, but keeping it simple in the options above. Because with income deduction I also need to factor in the impact of foregoing standard deductions.

[nelsona]

Be aware that FTCs are credited at the EFFECTIVE, not marginal rate, so it is unlikely that you will ever hit a 25% effective taxrate. So your options 1,2,3 are based on a false premise. Option 4 is likely the best

Also, in the above scenario 2 , you wuld need to generate Foreign GENERAL income (not passive, like interest or dividends) that is not taxed in Canada (not easy), in order to recoup the carryforward part of the 25% NR tax thru FTCs.

If it is a large RRSP,, then indeed taking the 25% tax as a deduction, especially if you do it soon enough after entering US that there is little US-taxable income (and of course maximizing other itemized deductions in that year), may be the best initial strategy,

[Cdninga]

I agree with Nelsona on using option 4. I converted my RRSP to a RRIF three years ago and have been taking the maximum allowable distribution every year to keep the tax rate at 15%. (Distribution not to exceed 10% of RRIF plan total at the start of the year). If I lump together my RRIF distribution, OAS and CPP payments, my FTC comes out pretty close to my payment to CRA. I've done a lot of number crunching to see if a larger RRIF distribution would be workable but I can't find any scenario where a 25% CRA witholding makes tax sense.

[nelsona]

In addition to agreeing with me on RRIF scenario, :), poster makes an excellent point about using CPP and OAS income (which is Cdn-sourced, but not taxed in Canada) towards the FTC calculation. I no longer have any RRIF/RRSP income, however I have banked Cdn general limit income that I am now using to cover any US tax on CPP (and eventually OAS).

Just be careful that you are closer to CPP/OAS collecting age, so as not to lose any carryforward due to the 10-year limit.

[pl0910001]

Hey Nelsona. Can you please elaborate on a few things you mentioned?

if CPP and OAS is not taxed, how does one use the income towards foreign tax credit calculation? Also, what do you mean by banked Cdn general limit income and the carryforward?

[nelsona]

CPP and OAS are taxed in US when living in US. Other Cdn income (wages, pension RRSP etc) sourced from Canada is taxed in BOTH countries if you are a US citizen or resident. So, over the years, you may have built up a lot of CDn tax that you have brought forward while living in either country.

So while a year you are libving in US (CPP/OAS taxed in US only, and NOT in Canada), you can still use old Cdn tax that you paid for general income, that was not used, but carried forward for the past 10 years.

[pl0910001]

i think i understand. if you paid more tax in canada than you could have recouped with the FTC, you can carry that tax forward for up to 10 years to claim as foreign tax paid, even if in the case of CPP and OAS, there was no tax paid but there was income?
Thanks again for your usual great insights and advice

[nelsona]

Yup.
Cdns sometimes have trouble with that concept because (a) CRA only allows credits from tax withing that year (no carry forward), and (b) has rules that state that income on which no tax was owed in the foreign country cannot be included in the FTC calculation.

IRS has no such limitations.