Hi,
We are Americans living and working in Canada. We expect to be here long-term, although I have no idea if we will retire in Canada or the US.
My husband is now eligible to contribute to an RRSP and his employer will match this. We have also thought about getting a spousal RRSP for me (I'm home with kids right now).
We also have Roth IRAs in the US. We are doing the foreign tax credit with our US taxes now, which my tax lawyer has said allows us to make Roth IRA contributions.
We think given the matching money with my husband's RRSP, this is a must-do. But given that our retirement location is unsure, what do you think makes the most sense with any extra money? Spousal RRSP? Roth IRA contributions? We are also interested in RESPs for our kids and understand that money can be transferred to an RRSP if needed. I'm not sure of the tax ramifications of having the bulk of our retirement plan being in Canada, if we retire in the US, and vice versa. Thanks in advance for any ideas!
RRSPs and Roth IRAs
Moderator: Mark T Serbinski CA CPA
Why you would fund a Roth while living in canada is beyond me.
First off, Canada does not recognize the Roth as a sheletered account, so you will be paying Cdn tax, on yearly growth, just as if it were a non-Roth. think about that, first. With that I would question any other strategy that your accountant is suggesting, too. paying into any US tax shelter while living in Canada is inadvisable.
Since you live in canada, and are barely -- if at all -- taxable in US, RRSPs are the sensible thing to do, matching or no. You will have to file reports on this income for IRS (but not be taxed until you withdraw the money).
RESPs are afforded no special status by IRS, so the growth in those accounts will need to be reported on your 1040 as well.
You need to be looking at investemrnts that are favourably treated by BOTH tax reimes. The most notable being your principal residence, which grows tax-free in canada, and $500K tax-free in US.
First off, Canada does not recognize the Roth as a sheletered account, so you will be paying Cdn tax, on yearly growth, just as if it were a non-Roth. think about that, first. With that I would question any other strategy that your accountant is suggesting, too. paying into any US tax shelter while living in Canada is inadvisable.
Since you live in canada, and are barely -- if at all -- taxable in US, RRSPs are the sensible thing to do, matching or no. You will have to file reports on this income for IRS (but not be taxed until you withdraw the money).
RESPs are afforded no special status by IRS, so the growth in those accounts will need to be reported on your 1040 as well.
You need to be looking at investemrnts that are favourably treated by BOTH tax reimes. The most notable being your principal residence, which grows tax-free in canada, and $500K tax-free in US.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
[quote="nelsona"]Why you would fund a Roth while living in canada is beyond me.
First off, Canada does not recognize the Roth as a sheletered account, so you will be paying Cdn tax, on yearly growth, just as if it were a non-Roth. think about that, first. With that I would question any other strategy that your accountant is suggesting, too. paying into any US tax shelter while living in Canada is inadvisable.
Since you live in canada, and are barely -- if at all -- taxable in US, RRSPs are the sensible thing to do, matching or no. You will have to file reports on this income for IRS (but not be taxed until you withdraw the money).
RESPs are afforded no special status by IRS, so the growth in those accounts will need to be reported on your 1040 as well.
You need to be looking at investemrnts that are favourably treated by BOTH tax reimes. The most notable being your principal residence, which grows tax-free in canada, and $500K tax-free in US.[/quote]
Thank you for the reply. My tax lawyer didn't actually suggest contributing to the Roth, just told me it was possible when I asked. Thanks for pointing out to me why this isn't a good idea. Sounds like you're saying going the RRSP and RESP route makes sense given our residence in Canada right now? What happens if we retire in the US and are drawing on an RRSP?
First off, Canada does not recognize the Roth as a sheletered account, so you will be paying Cdn tax, on yearly growth, just as if it were a non-Roth. think about that, first. With that I would question any other strategy that your accountant is suggesting, too. paying into any US tax shelter while living in Canada is inadvisable.
Since you live in canada, and are barely -- if at all -- taxable in US, RRSPs are the sensible thing to do, matching or no. You will have to file reports on this income for IRS (but not be taxed until you withdraw the money).
RESPs are afforded no special status by IRS, so the growth in those accounts will need to be reported on your 1040 as well.
You need to be looking at investemrnts that are favourably treated by BOTH tax reimes. The most notable being your principal residence, which grows tax-free in canada, and $500K tax-free in US.[/quote]
Thank you for the reply. My tax lawyer didn't actually suggest contributing to the Roth, just told me it was possible when I asked. Thanks for pointing out to me why this isn't a good idea. Sounds like you're saying going the RRSP and RESP route makes sense given our residence in Canada right now? What happens if we retire in the US and are drawing on an RRSP?
The RRSP makes sense. The RESP is debatable, but so long as you don't incur very much US tax on its growth (it is reportable every year on 1040) it's up to you. The US tax defeats the purpose of the Cdn tax-shelter.
Whether or not you are in US when you retire, you will pay Cdn tax on the full RRSP withdrawal, and US tax on the 'growth other than contribution', which will in all likelihood be covered by your Cdn tax.
Whether or not you are in US when you retire, you will pay Cdn tax on the full RRSP withdrawal, and US tax on the 'growth other than contribution', which will in all likelihood be covered by your Cdn tax.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Yes, the switch to foreign tax credit was for the child tax credit. As long as they allow it, it's $2000 extra a year for us for now.
Thanks for explaining the RRSP and RESP tax ramifications. I assume I would not have to pay tax to the US for any growth because of the foreign tax credit? As my lawyer had said, we pay far more in taxes in Canada on our income than we would on that comparable income were it in the US.
Thanks for explaining the RRSP and RESP tax ramifications. I assume I would not have to pay tax to the US for any growth because of the foreign tax credit? As my lawyer had said, we pay far more in taxes in Canada on our income than we would on that comparable income were it in the US.
The RESP would be passive income, so you would need to generate enough other passive income, taxable in Canada, to have enough tax to get credit for it, so count on paying *some* US tax on that RESP, in years when it performs well.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Foreign income credits are divvied up among different types of income (see Form 1116).
Your wages for example are "General limitation" income for the purposes of 1116. Caga gains, interest etc, are passive. Your foreign tax is 'split' between the types of income, so that you are only able to write off passive US income tax with passive foreign tax.
So, even in your 2006 return, you must have had at least 2 form 1116s, since you without doubt had both forms of income.
Since your RESP income would be considered passive, it would be lumped in with all your other investment income, but since the RESP would not have generated any Cdn tax, it is unlikley that your Cdn tax from the other investment income would be enough to overcome the US tax.
It might be small, certainly in the first years, to be of little concern. But since the idea of RESPs is to grow a large pool of money, US tax on that growth is a consideration for you.
Your wages for example are "General limitation" income for the purposes of 1116. Caga gains, interest etc, are passive. Your foreign tax is 'split' between the types of income, so that you are only able to write off passive US income tax with passive foreign tax.
So, even in your 2006 return, you must have had at least 2 form 1116s, since you without doubt had both forms of income.
Since your RESP income would be considered passive, it would be lumped in with all your other investment income, but since the RESP would not have generated any Cdn tax, it is unlikley that your Cdn tax from the other investment income would be enough to overcome the US tax.
It might be small, certainly in the first years, to be of little concern. But since the idea of RESPs is to grow a large pool of money, US tax on that growth is a consideration for you.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
RRSP accrued growth will only be reported to IRS -- if you file the election on Form 8891 -- when you withdraw these funds out of your RRSP/RRIF. You may of course choose to report pay the taxes to IRS every year, but this is almost never to your advantage, since you have no cdn tax to credit against it.
RESP growth will be taxed by IRS every year, regardless of whether you leave the funds in the RESP or not.
RESP growth will be taxed by IRS every year, regardless of whether you leave the funds in the RESP or not.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Thank you and I have another question! We signed up my husband for an RRSP today. The banker said that when we withdraw in retirement, we are taxed on the RRSP according to our income. If we are living in the US at that point, do we just tell them our US income and then they will tax the RRSP as if our income were Canadian income?
Currently, If you are a non-resident of Canada at the time of withdrawal, you will pay the lesser of a flat tax (15% if retired, 25% if not), or the rate if you included all your world income (this is known as a 217 return).
This will no doubt change by the time you retire.
This will no doubt change by the time you retire.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing