Hi.
My wife and I moved to the U.S in February '05.
We each have an RRSP in Canada. From browsing through this Forum, I have learned I need to report those RRSP accounts using Form 8991.
I've also learned that I can elect to defer U.S taxation on gains in the RRSP (obviously I would want do that). We have no plans to either withdraw from the RRSPs, or contribute to them before we move back.
What happens when we move back to Canada in a few years, and then withdraw that money (either at retirement or before). Am I actually required to pay U.S taxes at that time, and complete U.S TAX returns even though we've moved back to Canada? I would think that at that time, I am no longer a U.S resident so I do not owe any U.S Tax on that income (or do I.. because I deferred it). If I do owe U.S Tax, can that be claimed as Foreign Tax credits? I'm amazed by the potential for a scenario where we work here for 5 years, move back to canada and then 30 years later when I begin withdrawing from my RRSP, I suddently have to do a U.S Tax return.
I am confused..
Reporting RRSP on 8991 - What happens when you move back?
Moderator: Mark T Serbinski CA CPA
If you move back to Canada, your tax obligation (on non-US income) ends unless you area US citizen or a US green card holder. (There are a few other ways in which one can be required to continue reporting in uS, but these are unlilely to apply to you).
If neither of these apply to you, then you will not have to worry about any US taxes on your RRSP. Some have mistakenly concluded that using the deferral means that one is building up a tax obligation to be paid eithr on departure or on withdrawal of RRSP. This is not true.
But, if you become a US citizen or GC holder, you will be filing a 1040 every year -- even if lving in Canada,and will be deferring RRSP every year, and eventually paying some US tax on your RRSP withdrawals.
If neither of these apply to you, then you will not have to worry about any US taxes on your RRSP. Some have mistakenly concluded that using the deferral means that one is building up a tax obligation to be paid eithr on departure or on withdrawal of RRSP. This is not true.
But, if you become a US citizen or GC holder, you will be filing a 1040 every year -- even if lving in Canada,and will be deferring RRSP every year, and eventually paying some US tax on your RRSP withdrawals.
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
Thank you very much for clarifying that for me. I appreciate having somebody knowledgeable about these issues answer my questions. It just seems like there is so much confusion out there, and very few people that really know how these things work.
So, I would like to also ask your opinion on how we do retirement saving while in the U.S. Contributing to the RRSP clearly makes no sense, but of the various options available, IRA, Roth IRA and 401K is there any one in particular that is better suited to our situation? My thinking was either to use an IRA or 401K.
When we return to Canada, we would then have the choice of either leaving those retirement funds alone, or, tranferring them back to our RRSPs as a lump sum payment. I have a few questions and statements that I would really appreciate you confirming/answering. IF we leave the funds alone in the U.S:
1)Are gains in those funds reported and taxed in Canada? Are they protected in a manner similar to the RRSP deferral option but in the opposite direction?
2)If a withdrawal is made after the retirement age, we pay the appropriate income tax to the IRS, and report the withdrawal as income on our canadian return. We can claim foreign tax credits for income taxes paid to the U.S.
If we withdraw before retirement age, its the same except we pay a 10% penalty to the IRS and can claim more foreign tax credits.
IF we choose to transfer the funds back:
1)A 401K must be converted to an IRA prior to the transfer.
2)Does your RRSP contribution limit apply to this type of contribution? In otherwords, can we over contribute without penalty as a result of transferring the funds back
3)If you do this transfer when you are not a resident of the U.S, do you only pay the 10% early withdrawal penalty, plus whatever tax is due on that U.S income to the IRS (Canadian income is not reported)?
4)Is it true you can claim foreign tax credits both on the U.S income tax as well as the 10% tax penalty for early withdrawal ?
I hope my understanding is not way off the mark. Which of these alternatives do you believe is best for us. We will probably be here around five years. There is also the option of avoiding all "government" retirement programs as well as doing a Roth IRA.
Thanks again
So, I would like to also ask your opinion on how we do retirement saving while in the U.S. Contributing to the RRSP clearly makes no sense, but of the various options available, IRA, Roth IRA and 401K is there any one in particular that is better suited to our situation? My thinking was either to use an IRA or 401K.
When we return to Canada, we would then have the choice of either leaving those retirement funds alone, or, tranferring them back to our RRSPs as a lump sum payment. I have a few questions and statements that I would really appreciate you confirming/answering. IF we leave the funds alone in the U.S:
1)Are gains in those funds reported and taxed in Canada? Are they protected in a manner similar to the RRSP deferral option but in the opposite direction?
2)If a withdrawal is made after the retirement age, we pay the appropriate income tax to the IRS, and report the withdrawal as income on our canadian return. We can claim foreign tax credits for income taxes paid to the U.S.
If we withdraw before retirement age, its the same except we pay a 10% penalty to the IRS and can claim more foreign tax credits.
IF we choose to transfer the funds back:
1)A 401K must be converted to an IRA prior to the transfer.
2)Does your RRSP contribution limit apply to this type of contribution? In otherwords, can we over contribute without penalty as a result of transferring the funds back
3)If you do this transfer when you are not a resident of the U.S, do you only pay the 10% early withdrawal penalty, plus whatever tax is due on that U.S income to the IRS (Canadian income is not reported)?
4)Is it true you can claim foreign tax credits both on the U.S income tax as well as the 10% tax penalty for early withdrawal ?
I hope my understanding is not way off the mark. Which of these alternatives do you believe is best for us. We will probably be here around five years. There is also the option of avoiding all "government" retirement programs as well as doing a Roth IRA.
Thanks again
These issues have all been dealt with at length on this board.
A Roth wil be a headache when you return to Canada. The transfer will not be simple, so asssume taht yopu will be leaving your retirement accounts in US, as there is no tax harm in doing this.
A Roth wil be a headache when you return to Canada. The transfer will not be simple, so asssume taht yopu will be leaving your retirement accounts in US, as there is no tax harm in doing this.
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