IRAs and returning to Canada

This is our main tax information forum which deals with topics concerning Canadians living and working in the U.S., U.S. citizens contemplating working in Canada, and all aspects of Canadian and U.S. income tax and related adminstrative issues.

Moderator: Mark T Serbinski CA CPA

tyronen
Posts: 11
Joined: Fri Feb 11, 2005 8:22 pm

IRAs and returning to Canada

Post by tyronen » Fri Feb 11, 2005 8:27 pm

I am on a TN-1 and (for now) plan to stay in the US for at least five more years. I have a 401k with my employer (with about $7K) and an Ameritrade traditional IRA (with about $18K).

Last year I got married, so now find myself eligible to open a Roth IRA. In addition, I can open a traditional IRA for my wife (she can't do a Roth since she is on a TD and has no income of her own).

My questions:
- Is this even a good idea; i.e. do we face more tax costs than benefits if and when we return to Canada?
- Is there any US brokerage that would still deal with us if we returned to Canada? I read in another thread that even Canadian-owned TD Waterhouse USA doesn't do this.

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Fri Feb 11, 2005 9:47 pm

In choosing between Roth or Traditional IRA (I'll call IRA from here forwrd) there is no point worrying about the 'managing from Canada' issue, since that hurdle must be faced regardless of the type of account you have -- your 401(k), 401(k) rollover, IRA and/or Roth will (or will not) face this problem).

The question on Roths is that the growth, once you return to Canada, will no longer be sheltered. You would be faced with having to report and pay Cdn tax on the yearly income generated in your Roth. CRA is prepared on a case-by-case basis to deffer the tax, but that is no guarantee, and does mean that EVENTUALLY you will have to pay tax.

This defeats the main advantage of Roths over IRAs.

In fact, if you had the choice between a Roth and a non-deductible IRA, I would choose the <u>non-deductible IRA</u>, as it would mantain its tax deferred state in Canada, and the US and Cdn taxes on withdrawal would quite easily be matched.

Given that you still have a deductible IRA, and are in a high tax bracket (obvious from the fact that you couldn't Roth as a single person), I would keep funding my IRA.

Note that those with an employer pension plan (401(K) is NOT such a plan) the rules change dramitically, and deductible IRA is not possible.

<i>nelsona non grata</i>

tintin
Posts: 2
Joined: Fri Mar 11, 2005 1:57 am

Post by tintin » Fri Mar 11, 2005 2:09 am

Just doing my 2004 taxes. As far as I can tell, a 401K counts as a retirement plan, and if you have one and your AGI exceeds $55K (filing as single) then you can't deduct contributions to a traditional IRA. Is that right?

Regarding the Roth IRA, does Canada only tax the earnings made while you are in Canada? Ie. if you contribute C dollars while in the US, and have a total of X in the account when you return to Canada, and then the account grows to X+Y while in Canada, does Canada tax the amount (X+Y-C) or only (Y-C)?

tom

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Fri Mar 11, 2005 2:26 am

You are correct on the IRA deductibility limit, and on the fact that 401(k) is an employer plan.

Canada would view your Roth likea ny o=ther 'normal' investment and would thus only tax you (year by year) on the growth (Y in your example)


<i>nelsona non grata</i>

tintin
Posts: 2
Joined: Fri Mar 11, 2005 1:57 am

Post by tintin » Fri Mar 11, 2005 3:56 am

Thanks.

So if I am living in Canada when I retire, will the IRS withhold a non-resident tax on the Roth distributions? If not, then it would seem that there is potentially a tax benefit of the Roth over the traditional IRA, for Canadians returning to Canada for retirement. Ie. the amount 'X' remains untaxed in the example I gave before. Or is this too good to be true?

My motivation here is that I already have about $20K in a Roth, since I only found out recently CRA's unenlightened view on this. Trying to decide whether I should recharacterize my 2004 and 2005 contributions to a traditional IRA (even though I wouldn't be able to deduct them).

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Fri Mar 11, 2005 10:02 am

Obviously there would be no withholding tax on Roth distributions, unless the were unqualified and subjetct to 10% penalty. And even then this would apply only to the portion above your original contribution.

You cannot re-characterize a Roth to an IRA. You can only re-characterize the current year's Roth contribution (including any IRA to Roth rollover) to an IRA contribution.

In any event, the 'advantage' of a Roth over a non-deductible IRA in terms of Cdn taxation is there , but should not be overplayed.

Roth: Year to year taxation of any income after your arrival.

IRA: deferred taxation until distribution, with the undeductible portion tax-free.

So the only tax saving would be specifically on the US growth portion of the Roth. This would of course be more as the years went by. But this would come at the price of having to pay tax as you go.

Another advantage would be that if the Roth has capital gains, these would be taxed as cap gains, while an IRA would ultimately have its cap gains taxed as regular income.

So, indeed, unless you are only going to be in US for only 4 or 5 years, Roth is better than <i>non-deductible</i> IRA, but certainly not better than regular IRA/401(K).

<i>nelsona non grata</i>

wsgrant
Posts: 1
Joined: Tue May 31, 2005 10:51 am

Post by wsgrant » Tue May 31, 2005 11:19 am

Unless you're older than 55, you're screwed. I'm in that situation now. While working in the US, I always enrolled in my company's 401K, and eventually rolled them into an IRA. Until Canadians were forced to close their US brokerage accounts a few years ago, it didn't matter so much. I was considering moving back to Canada, until my broker told me that my account would then have to be closed and my IRA liquidated, triggering the 10% penalty, before taxes. If I could have forseen that, and I was definitely planing on returning to Canada, I would never have contributed to 401Ks or traditional IRAs.

Wouldn't the Roth IRA be the only choice to avoid the penalty?

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Tue May 31, 2005 11:34 am

Not all brokerages are forcing Cdn account holders to close, and there is no legal impediment to maintaining these RETIREMENT accounts cross-border (it may simply be your brokerage's policy to do this).

Find a more co-operative broker. There are plenty.

A Roth doesn't avoid all the penalty either, since the growth (not the contributed) portion of an early withdrawal will be subject to penalty and income tax.


<i>nelsona non grata... and non pro</i>

worryfreeinvestor
Posts: 144
Joined: Thu Mar 24, 2005 6:17 pm
Location: Seattle, WA

Post by worryfreeinvestor » Thu Jul 07, 2005 11:31 am

If I have a Roth IRA, and plan to move back to Canada, can I transfer the Roth IRA to a non-deductible IRA before I move back to Canada? (I suspect not, because it would change my US taxable income for previous years, requiring me to re-submit those 1040's, wouldn't it?)

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Thu Jul 07, 2005 11:46 am

It's not a matter of having to change your returns ( I don't see how you would have to change your taxabl;e income since there is no deduction for a Roth and no deduction for a non-deductible IRA contribution either)


It's simply that once money is in a Roth, it cannot be changed into a traditional IRA, except for the contribution made during the current tax year.

<i>nelsona non grata... and non pro</i>

Cook
Posts: 2
Joined: Sun Jul 17, 2005 9:17 pm

Post by Cook » Sun Jul 17, 2005 9:32 pm

I am a US Citizen contemplating a move to Canada. I have been contributing the maximum to my Roth IRA since they were created in the late 90's. After leaving my last employer, I also converted my 401(k) to a Roth. As a result, the majority of my retirement savings is in the form of a Roth IRAs. All of my Roth IRAs are invested in stock-owning mutual funds.

I understand if I obtain residency in Canada, my Roth will lose its status as a retirement account in that country, and I will have to pay taxes each year on the Roth's earnings. What I am unclear on is whether I will have to pay yearly taxes on the capital appreciation of my shares, or just the dividend income. It seems like the capital appreciation would not be taxable until the shares are redeemed, as is the case with a regular US investment brokerage account.

If the capital growth is taxed each year, is it taxed as a capital gain or as ordinary income? Also, if the growth is taxed each year, then does your basis in the "investment" get stepped up every year as well so that you are not taxed a second time upon redemption?

Thanks,
Douglas

Cook
Posts: 2
Joined: Sun Jul 17, 2005 9:17 pm

Post by Cook » Sun Jul 17, 2005 9:44 pm

I am a US Citizen contemplating a move to Canada. I have been contributing the maximum to my Roth IRA since they were created in the late 90's. After leaving my last employer, I also converted my 401(k) to a Roth. As a result, the majority of my retirement savings is in the form of a Roth IRAs. All of my Roth IRAs are invested in stock-owning mutual funds.

I understand if I obtain residency in Canada, my Roth will lose its status as a retirement account in that country, and I will have to pay taxes each year on the Roth's earnings. What I am unclear on is whether I will have to pay yearly taxes on the capital appreciation of my shares, or just the dividend income. It seems like the capital appreciation would not be taxable until the shares are redeemed, as is the case with a regular US investment brokerage account.

If the capital growth is taxed each year, is it taxed as a capital gain or as ordinary income? Also, if the growth is taxed each year, then does your basis in the "investment" get stepped up every year as well so that you are not taxed a second time upon redemption?

Thanks,
Douglas

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Sun Jul 17, 2005 11:57 pm

You account will be treated like any other investment account.

Remember thougfh, that when one moves to Canada,. everything you own is considered to have been sold and bought on that day, so while your Roth loses sheltering, and cap gains (triggered or not) are safe.

The Cdn tax clock only starts ticking on interst dividends and realized cap gains after that, just like any other account.

It was not the best idea to transfer all your 401(k) to a Roth as this was both a taxable event in US, and exposes that money immediately to Cdn tax [:(] You might want to reconsider this, if there is still time, and recharacterize that last Roth transfer as a Trad IRA, to save you both the US tax, and the upcoming Cdn tax headaches.


<i>nelsona non grata... and non pro</i>

mgl
Posts: 8
Joined: Wed Jul 27, 2005 11:02 pm

Post by mgl » Sat Jul 30, 2005 11:47 pm

I have a Roth IRA worth $5200. I'm Cnd, back in Canada, and plan to stay here. I'm trying to decide if I should cash it out now given what I've read here about capital gains and Cnd taxes.

I put $4500 into the account. I believe it was worth around $3800 when I moved to Canada in late 2002 and now it's back up to $5200. I assume this means I have $1400 in capital gains as far as the CRA is concerned, correct?

I wish I could combine it with my normal IRA. Or I wish I'd never opened the account.

nelsona
Posts: 16589
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Post by nelsona » Sun Jul 31, 2005 11:49 pm

<blockquote id="quote"><font size="1" face="Verdana, Arial, Helvetica" id="quote">quote:<hr height="1" noshade id="quote">I assume this means I have $1400 in capital gains as far as the CRA is concerned, correct?<hr height="1" noshade id="quote"></font id="quote"></blockquote id="quote">
YEs, but only when you sell or trade these investments.

I have always advised those who have even the slightest intenstion of going back to Canada, to focus on deductible IRA contributions, to get your bang now, rather than none later.

An non-Roth non-IRA portfolio is much better than a ROth, as you can get all the gains tax-free, penalty-free when you leave US.

<i>nelsona non grata... and non pro</i>

Post Reply