Hi,
I wanted to inquire as to the validity of the following approach for transferring IRA accounts back to Canada (before reaching the age requirement). I am aware of the "tricky" method where the account is transferred directly into an RRSP as a lump sum and then foreign tax credits are used to try and makeup for the 10% tax penalty + U.S income tax. For that to work, you need to owe a certain level of Canadian tax for everythign to balance out. I was curious as to wether this approach would also work.
The I.R.S allows for penalty free witdrawals if you setup a regular "annuity" type payment out of your account that lasts until your estimated date of death. If you move back to Canada, could you then set that up and begin taking payments over many years and slowly move the money back to canada. You would then report that payment as income and contribute it to your RRSP. I am only 28 years old so I expect the payment to be pretty small, and in the lowest income tax bracket in the U.S. You could still use the income tax paid to the U.S a foreign tax credit, and if the payment is small, I don't see contribution room in the RRSP being a problem. Wouldn't this method make "balancing" tax credits easier?
I'm not saying this method is a good way of doing it, but I was wondering if there was any situation where it could make sense.
Alternative method for transferring US retirement accounts
Moderator: Mark T Serbinski CA CPA
Yes, this would work, and this is how one would have done it before the introduction of the lump-sum method, but let's analyze what you are proposing:
First off, CRA has taken the position that such periodic payments are NOT eligible to be simply transfered to an RRSP, so you would, as you say, need to make them ordinary contributions, using up some RRSP contributin room (thus you would need rooom).
This would be akin to taking money out of one RRSP account, reporting and paying tax, and then turning around and making an equivalent contribution to another RRSP acount. The foreign tax credit would not change any of this.
You wouldn't do that with 2 Cdn RRSPs would you? whydo it with an IRA and an RRSP.
the only advantage of your way over the lump-sum method (And I am not one who thinks doing the transfer serves any useful benefit) is that you would not have to worry about CRA's handling of any penalty tax IRS charges (the seminal CRA document on IRA-RRSP in this regard is silent), and you would not have to worry about having matching Cdn income to fully use the US tax credit.
It may also be a way for you to take an IRA that is in your name and put it into a spousal RRSP.
But, in the sense that it is really only shuffling money between 2 retirment accounts and costing you contribution room.
First off, CRA has taken the position that such periodic payments are NOT eligible to be simply transfered to an RRSP, so you would, as you say, need to make them ordinary contributions, using up some RRSP contributin room (thus you would need rooom).
This would be akin to taking money out of one RRSP account, reporting and paying tax, and then turning around and making an equivalent contribution to another RRSP acount. The foreign tax credit would not change any of this.
You wouldn't do that with 2 Cdn RRSPs would you? whydo it with an IRA and an RRSP.
the only advantage of your way over the lump-sum method (And I am not one who thinks doing the transfer serves any useful benefit) is that you would not have to worry about CRA's handling of any penalty tax IRS charges (the seminal CRA document on IRA-RRSP in this regard is silent), and you would not have to worry about having matching Cdn income to fully use the US tax credit.
It may also be a way for you to take an IRA that is in your name and put it into a spousal RRSP.
But, in the sense that it is really only shuffling money between 2 retirment accounts and costing you contribution room.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 