1. Am a Canadian citizen.
2. Am a US resident (TN for about 7 years)
I have read the previous posts (on the old board) concerning how to move an IRA to an RRSP and believe I understand the general process.
Essentially I'd have to be a Canadian resident at the time, would collapse part of the IRA, pay the 10% penalty, pay US taxes like normal taxes on the amount of the collapse, and then apply (using the letters quoted) the amount of the taxes I paid (inc. 10% penalty to the IRS) to taxes due for earnings in Canada.
However, the amount of the IRA is something like $135,000 US. So, I would be happy to collapse the IRA over 2 or 3 years, or longer - assuming I have a high enough taxable income in Canada to base this against.
But how do I do this over a number of years?
Wouldn't I become a non-resident of the US say, in year 3 or 4, and therefore the IRS would expect a hold of 30% as a non-resident for IRA collapsing instead of 10% for those years?
What's the logical process of doing this over a number of years?
Thx. in advance.
Moving a larger IRA to RRSP
Moderator: Mark T Serbinski CA CPA
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Mark T Serbinski CA CPA
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Well, let's examine the entire process you intend to complete...
It seems that your funds are now in a tax deferred vehicle (IRA) in the U.S., and you want to move to Canada, and transfer it to another tax deferred vehicle (RRSP), and pay a 10$ penalty and U.S. non resident withholding taxes in the process.
If you do this, you likely will not ever get a foreign tax credit on the withholding tax (since the amount of the transferred IRA would not be taxable in Canada), and will not get credit for the 10% penalty.
Why not just leave the IRA intact? This provides you with the same position, with no cost.
On retirement at age 59 1/2 or over, you withdraw the funds from the IRA. If you are a Canadian resident at that time, you will be taxable in Canada on the withdrawal, just as if it were a withdrawal from an RRSP, and you will get credit for any U. S. withholding taxes you pay at that time.
In the meantime, the investment continues to grow deferred of tax.
Regards,
Mark T. Serbinski, CA, CPA
It seems that your funds are now in a tax deferred vehicle (IRA) in the U.S., and you want to move to Canada, and transfer it to another tax deferred vehicle (RRSP), and pay a 10$ penalty and U.S. non resident withholding taxes in the process.
If you do this, you likely will not ever get a foreign tax credit on the withholding tax (since the amount of the transferred IRA would not be taxable in Canada), and will not get credit for the 10% penalty.
Why not just leave the IRA intact? This provides you with the same position, with no cost.
On retirement at age 59 1/2 or over, you withdraw the funds from the IRA. If you are a Canadian resident at that time, you will be taxable in Canada on the withdrawal, just as if it were a withdrawal from an RRSP, and you will get credit for any U. S. withholding taxes you pay at that time.
In the meantime, the investment continues to grow deferred of tax.
Regards,
Mark T. Serbinski, CA, CPA
On mark's point about the tax credit.
CRA has made it clear in those letters that the tax would be deductible insofar as one would have sufficient other Cdn income to offset the US tax.
For a $20K ira this could be done easily, to simplify future.
But for a large IRA, as Mark sez, the trouble of collapsing it over several years, just to put it in an RRSP that will eventually be taxed is a lot of work for no gain, and you are then subjecting your self to the same restrictive RRSP rules.
No, the decision one has to make with a large IRA is whether to collapse it completely just before leaving US (preferably in January), or leaving it until years when you have low income.
AGN
CRA has made it clear in those letters that the tax would be deductible insofar as one would have sufficient other Cdn income to offset the US tax.
For a $20K ira this could be done easily, to simplify future.
But for a large IRA, as Mark sez, the trouble of collapsing it over several years, just to put it in an RRSP that will eventually be taxed is a lot of work for no gain, and you are then subjecting your self to the same restrictive RRSP rules.
No, the decision one has to make with a large IRA is whether to collapse it completely just before leaving US (preferably in January), or leaving it until years when you have low income.
AGN
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Mark T Serbinski CA CPA
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I guess the main point I was trying to make is that having a tax deferred plan can be beneficial, unless you are in dire need of the funds at this time. Pre tax growth of your investments until retirement age is a major benefit, which will make your total retirement savings compound much more rapidly.
Regards,
Mark T. Serbinski, CA, CPA
Regards,
Mark T. Serbinski, CA, CPA
Thx. for the info.
1. The reason I was thinking about moving the IRA into an RRSP, is I really like the RRSP's flexibility way more than the IRA. For example, if the money was in an RRSP, I could quite happily take out say $20 - $30 CDN a year, get no 10% penalty, and live happily being a ######, listen to music, watching Star Trek ... whatever. Might not do it, but I like the idea of not getting an early withdrawal penalty when I want to enjoy a couple of years of not having to work.
2. However, if I left it in the US.
a. After I reach 59 1/2 or more, I then take out say, $30 US in a year. I get the 10% penalty and the $30 US becomes income which I'm taxed on. But if I'm not a US resident at that time, does the IRS make the financial institution it's with, hold 10% (ie: $3K) or 30% (ie: $9K)?
b. So, then REV CAN sees the $30K US as income. What happens with the 10% penalty?, the held back $3K or $9K? - when I'm 59 1/2 or more.
3. If I don't leave it in the US now.
a. My original question is still of concern. Can it be down over 3 - 4 years when I have Canadian income. Or better still, let's say I have a job in Canada in 2005. I make say, $80K CDN and pay taxes of ... I don't know ... $20K CDN? Knowing that, and the letters quoted, could I take out the appropriate amount from my US IRA for that year (with the 10% penalty + tax on the amount withdrawn) to essentially get my CDN taxes that year to relatively $0. Then, let's say I don't touch the IRA for 2 more years until I have another well paying income, say the same $80 CDN again. Can I do the same again, OR, am I now a non-resident of the US and they withhold 30% + tax on amount withdrawn?
Hopefully I'm explaining this all well enough. It would be great to know my total options and if it takes years to pull it out, then so be it. If it has to stay in the US - then so be it again.
Thx. again.
Russ
1. The reason I was thinking about moving the IRA into an RRSP, is I really like the RRSP's flexibility way more than the IRA. For example, if the money was in an RRSP, I could quite happily take out say $20 - $30 CDN a year, get no 10% penalty, and live happily being a ######, listen to music, watching Star Trek ... whatever. Might not do it, but I like the idea of not getting an early withdrawal penalty when I want to enjoy a couple of years of not having to work.
2. However, if I left it in the US.
a. After I reach 59 1/2 or more, I then take out say, $30 US in a year. I get the 10% penalty and the $30 US becomes income which I'm taxed on. But if I'm not a US resident at that time, does the IRS make the financial institution it's with, hold 10% (ie: $3K) or 30% (ie: $9K)?
b. So, then REV CAN sees the $30K US as income. What happens with the 10% penalty?, the held back $3K or $9K? - when I'm 59 1/2 or more.
3. If I don't leave it in the US now.
a. My original question is still of concern. Can it be down over 3 - 4 years when I have Canadian income. Or better still, let's say I have a job in Canada in 2005. I make say, $80K CDN and pay taxes of ... I don't know ... $20K CDN? Knowing that, and the letters quoted, could I take out the appropriate amount from my US IRA for that year (with the 10% penalty + tax on the amount withdrawn) to essentially get my CDN taxes that year to relatively $0. Then, let's say I don't touch the IRA for 2 more years until I have another well paying income, say the same $80 CDN again. Can I do the same again, OR, am I now a non-resident of the US and they withhold 30% + tax on amount withdrawn?
Hopefully I'm explaining this all well enough. It would be great to know my total options and if it takes years to pull it out, then so be it. If it has to stay in the US - then so be it again.
Thx. again.
Russ
russ,. i think you are confusing the 10% penalty as something extra that.
If you take out $30K Cdn in IRA money while living in Canada, you Cdn tax will still be more than your US tax including the 10% added tax, so you will be able to take credit for all the US tax you paid including the penalty.
Don't worry so much about what is actually withheld from your IRA when you take it; you can always file a 1040NR and recoup the extra.
So there is no more flexibility in an RRSP, as the US tax rrate will almost ALWAYS be lower than your Cdn marginal rate, so you will always get to use all the US tax and ALL the penalty as credit.
As to you other scenarios about using the IRA tax to cover your Cdn tax, this will work, but is unnecessarily complicated, given the need to be sure that you owe less tax in US than Canada, and THERE IS NO BENEFIT IN DOING THIS in the long run.
You have been out of canada for a while-- perhaps you didn't realize that RRSPs are losing favour in canada because of their fully taxable position. People are looking for ways to get money OUT of RRSP (HBP and learning credit are becoming very popular) as well as the push for TSSP.
Like I said, when it comes time to move, you should be looking to either collapse it before entering Canada, or leaving it where it is until you are in low-tax years.
<i>nelsona non grata</i>
If you take out $30K Cdn in IRA money while living in Canada, you Cdn tax will still be more than your US tax including the 10% added tax, so you will be able to take credit for all the US tax you paid including the penalty.
Don't worry so much about what is actually withheld from your IRA when you take it; you can always file a 1040NR and recoup the extra.
So there is no more flexibility in an RRSP, as the US tax rrate will almost ALWAYS be lower than your Cdn marginal rate, so you will always get to use all the US tax and ALL the penalty as credit.
As to you other scenarios about using the IRA tax to cover your Cdn tax, this will work, but is unnecessarily complicated, given the need to be sure that you owe less tax in US than Canada, and THERE IS NO BENEFIT IN DOING THIS in the long run.
You have been out of canada for a while-- perhaps you didn't realize that RRSPs are losing favour in canada because of their fully taxable position. People are looking for ways to get money OUT of RRSP (HBP and learning credit are becoming very popular) as well as the push for TSSP.
Like I said, when it comes time to move, you should be looking to either collapse it before entering Canada, or leaving it where it is until you are in low-tax years.
<i>nelsona non grata</i>
Thanks again Nelson.
Now one last question ... really ... okay, maybe!
Okay, so I leave the IRA alone in the US and do what you suggest (ie: until 59 1/2+).
What if I died next year (I'm only 43-ish!) ... bummer ... does this get incredibly ugly as US wants some withholding and Can wants some withholding on this IRA ... or does it essentially equal out with tax agreements between the US and Canada?
Thx.
Oh, and you're right ... it's been a while since I've had to worry about investing, etc. in Canada and I didn't know the RRSP thing was going out of favour.
Now one last question ... really ... okay, maybe!
Okay, so I leave the IRA alone in the US and do what you suggest (ie: until 59 1/2+).
What if I died next year (I'm only 43-ish!) ... bummer ... does this get incredibly ugly as US wants some withholding and Can wants some withholding on this IRA ... or does it essentially equal out with tax agreements between the US and Canada?
Thx.
Oh, and you're right ... it's been a while since I've had to worry about investing, etc. in Canada and I didn't know the RRSP thing was going out of favour.
I've been thinking about this some more. All answers have been great information (thanks in advance), but I'm just wondering on something.
IF, say 5 years from now, I'm no longer a US Resident, but just a Canadian resident (am Canadian citizen). Say I worked for a year and had Canadian tax owing of $20K or so. Could I then do what we've discussed here and the IRS would make the institution hold back 10% penalty, but the money removed would be taxable. So, whatever that amount would be to be less than or equal to the $20K in Canadian tax (say $50K US for a guess) could be moved into an RRSP in Canada.
So, no loss ... no gain.
However, the next year I decide to make no money. I could then take some money out of the RRSP and that would be my income.
1. For an extremely flexible lifestyle, wouldn't this work?
2. Again, 5 years after I'm a non-resident of the US, the IRS still only hold 10% + the amount withdrawn is taxable?
Thx. again.
IF, say 5 years from now, I'm no longer a US Resident, but just a Canadian resident (am Canadian citizen). Say I worked for a year and had Canadian tax owing of $20K or so. Could I then do what we've discussed here and the IRS would make the institution hold back 10% penalty, but the money removed would be taxable. So, whatever that amount would be to be less than or equal to the $20K in Canadian tax (say $50K US for a guess) could be moved into an RRSP in Canada.
So, no loss ... no gain.
However, the next year I decide to make no money. I could then take some money out of the RRSP and that would be my income.
1. For an extremely flexible lifestyle, wouldn't this work?
2. Again, 5 years after I'm a non-resident of the US, the IRS still only hold 10% + the amount withdrawn is taxable?
Thx. again.
Sure.
But seriously, you are over-thinking this issue. There is only a very narrow income range in which your US tax (including the 10% early withdrawal tax) would be more than your Cdn taxrate.
Anything more than $12-15K Cdn will be taxed more in Canada than in US.
So, in your convoluted scenarios above, simply figure on cashing RRSPs in years when you will want LESS than $15K in income (including RRSP/IRA money) and cashing IRAs in years when you will want MORE than $15K income including the IRA.
Forget the transfer process, its unneccesarily complicated, and does rely on individual treatment by CRA assessors, which could mean fighting in some years.[xx(]
<i>nelsona non grata</i>
But seriously, you are over-thinking this issue. There is only a very narrow income range in which your US tax (including the 10% early withdrawal tax) would be more than your Cdn taxrate.
Anything more than $12-15K Cdn will be taxed more in Canada than in US.
So, in your convoluted scenarios above, simply figure on cashing RRSPs in years when you will want LESS than $15K in income (including RRSP/IRA money) and cashing IRAs in years when you will want MORE than $15K income including the IRA.
Forget the transfer process, its unneccesarily complicated, and does rely on individual treatment by CRA assessors, which could mean fighting in some years.[xx(]
<i>nelsona non grata</i>