What to do with Roth IRA left in US

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yeebuddy
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What to do with Roth IRA left in US

Post by yeebuddy »

I moved to Canada this year from US. I left behind a Roth IRA account which made few thousands for the past years. Since Canada does not honor Roth retirement account, I am planning to take it out next year for other use. Will I be taxed in both countries when I take it out? What do you think is the best way to handle this account? Thank you.
Mark T Serbinski CA CPA
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Post by Mark T Serbinski CA CPA »

First of all, if you collapse the Roth now, you will pay a 10% tax penalty (assuming you are under age 59 1/2).

Secondly, although there are provisions to transfer a U.S. IRA to your RRSP, penalties and/or taxes would still apply. In addition, you risk putting what is intended to be a tax free pension into a taxable pension (the RRSP).

Although the jury is still out on this, the Treaty between Canada and the U.S. states that pensions are to be taxed only in the country of residence, but using the tax rates which would be applicable in the country of origin. If you extend this reasoning, then, upon your eventual withdrawal after age 59 1/2, the Roth will be removed tax free in the U.S., and likely will also be tax free in Canada.

I would leave it intact until retirement.
Mark
nelsona
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Post by nelsona »

Where to begin....
if you collapse the Roth now, you will pay a 10% tax penalty (assuming you are under age 59 1/2).
Actually, the 10% penalty would only be incured on withdrawals in excess of your own contributions.
Although the jury is still out on this...
The jury -- in this case the Minister of Finance -- has already spoken on this 7 years ago.

http://www.fin.gc.ca/news98/98-129e.html
Mr. Martin noted that the deferral opportunities in the U.S. for Roth IRAs are far more generous than the deferral opportunities in the U.S. for ordinary IRAs and the deferral opportunities in Canada for tax-assisted retirement savings. In particular, contributions can be made to a Roth IRA at any age, and there is no requirement for payments under a Roth IRA to begin by a certain age. Accordingly, there are no plans to provide tax assistance by way of an exemption from or deferral of taxation in Canada on earnings within a Roth IRA.
To be sure, none of the earnings you've made in your Roth before the day you arrive in Canada will be taxed in Canada. This is the same for any non-retirement account (the Roth is NOT considered a retirement account -- see above).

The earnings made ASFTER you come to Canada are taxable. the treaty affords NO protection from (unlike RRSP, IRA, 01(k), etc).

That said, CRA will, on a case-by-case basis, allow one in your position to DEFER (but will not forgive) Cdn tax until such time as you withdraw the money. This is not a particularly bad situation, as this is exactly how RRSP-holders can choose to be taxes by IRS: Tax on Post-arrival gains deferred until funds are withdrawn from the plan.

The wrinkle of course is that an RRSP will always be taxed by Canada, whjile a Roth is not taxed by IRS, so there is no chance for balancing tax credits. ans an RRSP has benefitted fro ma tax-free contribition, which a Roth of course does not.

Perhaps someday, maybe sooner rather than later, the treaty will provide protestion for the tax-free status of Roths, but for now, it nor the Cdn Govt do so.
the Treaty between Canada and the U.S. states that pensions are to be taxed only in the country of residence, but using the tax rates which would be applicable in the country of origin.
There is no such language in the Treaty. Both countries may (and do) exercise taxation on pensions coming from their countries. That is why IRAs remain taxed in US and RRSPs remain taxed in Canada regardless of whre one lives. Nor is there anything that restricts the tax rate on these pensions in their country of residence.

In any event, I repeat, Roths are not pensions.

What to do?

As Mark correctly said, there is little benefit of attempting to transfer this money into an RRSP -- even if such a Roth - RRSP transfer was possible (it isn't: only Traditional IRA - RRSP is accepted by CRA).

Also, there is no advantage to immediately collapsing it, either before or after arriving in Canada.

You could consider removing your contribution amount tax-free in US at some point, especially when you would have equitable tax liability in Canada on the post-arrival gains, if you have worked out such an arrangent with CRA.

Or, you could simply NEVER take it out (remmebr, there are no required Roth withdrawals at any age) and let your estate pay the Cdn tax on it.

But, bottom line, there is no getting around the fact that moving to Canada, under current rules, diminsihes the tax-free lustre of Roths, and if one with plans of moving or returning to Canada is contemplating investing in such a vehicle , one should seriously consider first fully funding the approved pension vehicles which give rise to (a) an immediate US tax deduction, and (b) have treaty-protected status.
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Mark T Serbinski CA CPA
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Post by Mark T Serbinski CA CPA »

Re: Canada U.S. Income Tax Convention:

The term “pensionsâ€￾ is defined in paragraph 3 for the purposes of the Convention. It includes any payment, whether or not periodic, under a superannuation, pension, or retirement plan, armed forces retirement pay, war veterans pension allowance, and amounts paid under a sickness, accident, or disability plan. The Third Protocol amended the definition of “pensionsâ€￾so as to clarify that it includes, for example, payments from Individual Retirement Accounts (IRAs) in the United States.

"Article XVIII
Pensions and Annuities
1. Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any such pension that would be excluded from taxable income in the first-mentioned State if the recipient were a resident thereof shall be exempt from taxation in that other State."

Please note that the Treaty, as noted above, overrides domestic law in Canada, and certainly overrides Mr. Martin's comments.

If the Third Protocol defined a pension as an IRA; and
If a Roth IRA is an IRA; then
The Roth distribution should be free of tax in Canada, since the tax treatment in the U.S. is to exclude it from income... per Article XVIII (1).

As far as the jury being out.... this application of the Treaty has not yet been tested in court, to my knowledge.
Mark
nelsona
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Post by nelsona »

"Mr Martin' comments" as you seem to dismiss them, would more correctly be referred to as the opinion of the "Competant Authority" for Canada vis-a-vis the Treaty, in his role as Finance Minister at the time, thus he was speaking, not his own opinion, but Canada's view of a Roth, and outlinedd EXACTLY what Canada considers Roths: They are NOT considered pensions under Article XVIII.

Mr Manley (again, in his role as Canada's Competant Authority) more recently also enacted legisltion regarding the IRA to Roth transfer mechanism which reinforced the notion that Roths are not pensions.

Hopefully, the treaty will be modified at some point in the near future to adress the 'silence' of the treaty on this matter, but until then, what the Minister of Finance's 'opinion' on these matters, carries the day.

In fact, many Americans living in Canada are using the arrangement I outlined above, as directed by CRA.
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webcite_99
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Post by webcite_99 »

I was wondering if there was any closure on this subject as it seems that Mark and Nelsona have opposite positions.

If there is still a friendly disagreement, would there be a safe harbor similar to an advice of counsel defense if a person did not pay taxes on their Roth IRA distributions based on a professional opinion (paid for of course and not just this site) consistent with Mark’s opinion? In other words, what if someone were to have paid accounting advice to the effect that proceeds from a Roth IRA do not need to be disclosed and the CRA somewhere down the road took the opposite opinion and pursued the individual for unpaid taxes?
nelsona
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Post by nelsona »

Loo kon almost any big 4 Cdb tax site and they will point out that Roths are taxable as you go.

The added feature of allowing one to defer the tax until withdrawal comes from diect contact between an associate and CRA.

But, as to the fact that post-arrival gains of roth aretaxable at some point, there is absolutely no doubt.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
nelsona
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Post by nelsona »

... the next round of treaty talks may have language to deal with this, but that would largely depend on canada adopting a similar account scheme.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D
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