Hi everyone. I know RRSPs have been covered very much in depth in these forums, and as such today I have spent a few hours on threads dating back the last year and a half to research it as much as possible so I don't repeat what's already been answered.
I want to evaluate the options of whether to leave my RRSPs in Canada, or collapse the RRSP and invest in the US, and want to make sure I understand each of these options fully. I am a former Canadian resident (until 2002) now living in California with a green card with no ties to Canada or any Canadian income. It's most likely I will stay in the US permanently, but there is a small chance I will retire back to Canada eventually.
In deciding whether to dissolve my RRSP or keep it, I would very much appreciate your help with the following! Please correct me if I am wrong or add anything I have missed.
Option 1: leave RRSP in Canada, living in US
- need to report RRSP values every year on IRS form 8891, beginning with tax year 2004.
- need to report RRSP values on TD F 90-22.1 to US Treasury annually.
- pay California state taxes on annual increase in value
- Expect no withdrawals until retirement.
- Initial "cost/book value" can be withdrawn tax-free in US. Q1-won't there be Cdn taxes due?
Q2: When earning from the fund during retirement, how will taxes be remitted? I presume that 100% of the income is reported via a 1040, taxed at US rates, and if there is anything deducted at source in Canada, it can be applied on the 1040 against the US tax owed. No Cdn tax returns required.
Option 2: collapse RRSP and reinvest elsewhere in USA
- report distribution of funds on IRS form 8891
- tax withheld by fund administrator in the amount of 25% of withdrawal amount (non-resident tax)
- report income on 1040 as follows:
a) INCOME--line 7b on 8891--difference between the book value upon entry to US and the distribution value. Book value is calculated as contributions made while resident in Canada + income reinvested in fund while resident in Canada.
b) CAPITAL GAIN--value at distribution, less book value upon entry to US, less income per (a) above. Taxed at capital gain rates (Q3: This is currently...?)
Example:
A Book value: $8k
B Value upon entry to US: $10k
C Poss. distribution value: $15k
a) Income = C minus A = $7k
b) Cap G. = C minus B minus income $7k = ($2k)
Option 3: leave RRSP as-is, retire to Canada
- income taxed in Canada
- Q4 - income taxed in US?
Thanks in advance to nelsona or anyone else who can help clarify whether I've got it or not!
RRSP options & implications - Cdn now in USA
Moderator: Mark T Serbinski CA CPA
A1 -your cdn tax , if you withdraw it as a pension will be 15% flat.
A2- you will report the entire withdrawl for the year, but only a portion will be taxable (16a/16b on 1040). The taxable portion, and the 15% tax will be used to determine your tax credit for IRS. your withdrawls won't be reported in California, except to the extent that they create yearly income.
A3- you would only report on line 7a and 7b, and bring this to 16a and 16b. there would be no cap gains. the taxable portion would be C-A= $7K. The 7K and the 25% tax would be used on 1116. cap gains would be reported on your cali return.
A4- if you return to canada, having not become a US citizen, then you will not pay any IRS tax on any RRSP withdrawals made while in Canada. you will have paid Cali tax, which is unrecoverable.
The fact that you are already having to declare and pay tax in Cali on your RRSP would tend to make me want to collapse it sooner rather than later and invest it in non-taxable US investments like your home. It will also simplify your tax life.
A2- you will report the entire withdrawl for the year, but only a portion will be taxable (16a/16b on 1040). The taxable portion, and the 15% tax will be used to determine your tax credit for IRS. your withdrawls won't be reported in California, except to the extent that they create yearly income.
A3- you would only report on line 7a and 7b, and bring this to 16a and 16b. there would be no cap gains. the taxable portion would be C-A= $7K. The 7K and the 25% tax would be used on 1116. cap gains would be reported on your cali return.
A4- if you return to canada, having not become a US citizen, then you will not pay any IRS tax on any RRSP withdrawals made while in Canada. you will have paid Cali tax, which is unrecoverable.
The fact that you are already having to declare and pay tax in Cali on your RRSP would tend to make me want to collapse it sooner rather than later and invest it in non-taxable US investments like your home. It will also simplify your tax life.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Thanks Nelson! Just one further clarification, then, if I may--if I become a US citizen, how will the situation be different?nelsona wrote:A4- if you return to canada, having not become a US citizen, then you will not pay any IRS tax on any RRSP withdrawals made while in Canada. you will have paid Cali tax, which is unrecoverable.
Well, then all your RRSP growth from the moment you became a US tax resident would be taxable, just like it is for US citizens right now, who for example, live in canada and contribute to RRSP.
If they contribute $100,000 over their lifetime, and then eventually withdraw $250,000 (either lumpsum or over time), $150,000 will have been taxable in US (and $250,000 taxable in canada), regardless of where they end up living.
If they contribute $100,000 over their lifetime, and then eventually withdraw $250,000 (either lumpsum or over time), $150,000 will have been taxable in US (and $250,000 taxable in canada), regardless of where they end up living.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
I would like to see if I understand taxation of RSP withdrawels correctly, specifically with regard to "book value vs market value".
Let's suppose that a Canadian resident maximizes the book value of their RSP account to a value of $50K when they move and become a resident of US. They work in the US for many years while deferring taxation using Form 8891. Many years later the value of the RSP is $100K and they decide to withdraw funds from the RSP before the age of 59.
1) If they withdraw $50K from their RSP, they would pay 25% non-resident tax to Canada ($12.5K) and would thus have $37.5K to put into their bank account. None of this would be need to be reported in the US because it was the book value of the account when they moved to the US?
2) If they withdraw $75K from their RSP, they would pay 25% non-resident tax to Canada ($18,750), and would be taxed only on $25K in the US. The $25K would be added to their taxable income in the US, and the canadian tax paid on the $25K ( $6,250 ) could be used as foreign tax credits in the US?
Is this correct? Did I miss anything?
Let's suppose that a Canadian resident maximizes the book value of their RSP account to a value of $50K when they move and become a resident of US. They work in the US for many years while deferring taxation using Form 8891. Many years later the value of the RSP is $100K and they decide to withdraw funds from the RSP before the age of 59.
1) If they withdraw $50K from their RSP, they would pay 25% non-resident tax to Canada ($12.5K) and would thus have $37.5K to put into their bank account. None of this would be need to be reported in the US because it was the book value of the account when they moved to the US?
2) If they withdraw $75K from their RSP, they would pay 25% non-resident tax to Canada ($18,750), and would be taxed only on $25K in the US. The $25K would be added to their taxable income in the US, and the canadian tax paid on the $25K ( $6,250 ) could be used as foreign tax credits in the US?
Is this correct? Did I miss anything?
First off, the age at which you withdrew this money is meaningless.
1. All of the withdrawl would be reported on Form 8891 (and as gross income on line 16a). The amount that you would report as taxable on 16b is actually a choice -- a choice that once you make you should stick to for the entire time you withdraw your RRSPs:
a) you could choose to use up the $50K that is tax-free all in one shot, thus reporting 0 as your net income on 16b. . Probably not the best choice, as you have paid Cdn tax, and won't be able to use it on your US return as a credit, but can use it as deduction. You would only use this if you were able to consistently withdraw your RRSP with no tax in canada.
b) Since you are withdrawing 1/2 of the total RRSP asset, you could choose to allocate 1/2 of your tax-free part, and thus report 25K as taxable on 16b. This would get some measure of tax balance to use up your Cdn tax. This would be the usual method of someone who withdraws their RRSP periodically over many years, like a pension.
c). You could by treaty decide to report the entire 50K as taxable, saving your 50K tax-free for later. This might be advantageous if pulling out large sums from your RRSP with little other income, or when your income will increase in the future.
Same scenario for your second question.
1. All of the withdrawl would be reported on Form 8891 (and as gross income on line 16a). The amount that you would report as taxable on 16b is actually a choice -- a choice that once you make you should stick to for the entire time you withdraw your RRSPs:
a) you could choose to use up the $50K that is tax-free all in one shot, thus reporting 0 as your net income on 16b. . Probably not the best choice, as you have paid Cdn tax, and won't be able to use it on your US return as a credit, but can use it as deduction. You would only use this if you were able to consistently withdraw your RRSP with no tax in canada.
b) Since you are withdrawing 1/2 of the total RRSP asset, you could choose to allocate 1/2 of your tax-free part, and thus report 25K as taxable on 16b. This would get some measure of tax balance to use up your Cdn tax. This would be the usual method of someone who withdraws their RRSP periodically over many years, like a pension.
c). You could by treaty decide to report the entire 50K as taxable, saving your 50K tax-free for later. This might be advantageous if pulling out large sums from your RRSP with little other income, or when your income will increase in the future.
Same scenario for your second question.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing