More RRSP questions
Moderator: Mark T Serbinski CA CPA
More RRSP questions
I may have asked this before, but I have a question about RRSPs. We are Americans in Canada. My husband has an RRSP plan through his employer--we are considering trying to contribute as much as the CRA says we can. But I'm still kind of hazy on what will happen with our RRSP money if we retire in the US. Will we be able to draw on it without much penalty? Is there any other reason not to max out his RRSP?
As an amereican, all his RRSP contributions until this year have not been tax deductible in US, and thus, he will at some point ber allowed to draw out theat ammount tax free, the rest, the growth, etc, will be subject to tax.
In canada it will ALL be subject to tax.
Now, as of this year, his contributions become deductible in US as well as canada. This means that those contributions will also be taxable in US when he withdraws them.
The "problem" with this is that he proabably doesn't need the deduction in US, since he can use FEIE and FTC to avoid any US tax. But the contribution will still be taxable when he withdraws. it is knd of like those who contribute to IRA and RRSP when they have little or no tax liability. The withdrawl is still taxable even though they did not get a true tax deduction when it went in.
But this is not a big problem, since the US tax on the withdrawal will almost surely be less than the Cdn tax, regardless of where he lives.
So, I would in your shoes be using RRSP to cut down my Cdn tax NOW, and benefit from tax sheltering for the next few years.
My only proviso is thatI would not deduct so much as to bring me into the lowest tax bracket (less than $30,000).
I would also caution you that group plans generally don't allow spousal contributions, so he could be building a huge nest egg and you not. It is generally better to have bgger RRSP in the spouse that will have lowest income in future -- although that is not critical.
So, he might want to look at what he needs to put in through work to get the 'matching' and then decide if he can just contribute on his own to a spousal one, or to his own.
This brings up an issue that has not been clarified under the new rules: Private, self-funded RRSPs are presumably NOT treated the same as employer-sponsored RRSPs under the new treaty. It is possible that IRS may continue to view private RRSPs the same as they alsways have (as I described above). If this was the cxase, from a US tax point of view, these private contributions are more valuable, since the contributions ONLY will not be taxed later opon withdrawal.
Too soon to tell on that one.
So, if he has been contributiong to an RRSP in the past, with no US tax consequences, he probaly should continue to do so. Heshould use the employer sponsored RRSP to get matching, and look into income splitting by balancing out your RRSP with his.
In canada it will ALL be subject to tax.
Now, as of this year, his contributions become deductible in US as well as canada. This means that those contributions will also be taxable in US when he withdraws them.
The "problem" with this is that he proabably doesn't need the deduction in US, since he can use FEIE and FTC to avoid any US tax. But the contribution will still be taxable when he withdraws. it is knd of like those who contribute to IRA and RRSP when they have little or no tax liability. The withdrawl is still taxable even though they did not get a true tax deduction when it went in.
But this is not a big problem, since the US tax on the withdrawal will almost surely be less than the Cdn tax, regardless of where he lives.
So, I would in your shoes be using RRSP to cut down my Cdn tax NOW, and benefit from tax sheltering for the next few years.
My only proviso is thatI would not deduct so much as to bring me into the lowest tax bracket (less than $30,000).
I would also caution you that group plans generally don't allow spousal contributions, so he could be building a huge nest egg and you not. It is generally better to have bgger RRSP in the spouse that will have lowest income in future -- although that is not critical.
So, he might want to look at what he needs to put in through work to get the 'matching' and then decide if he can just contribute on his own to a spousal one, or to his own.
This brings up an issue that has not been clarified under the new rules: Private, self-funded RRSPs are presumably NOT treated the same as employer-sponsored RRSPs under the new treaty. It is possible that IRS may continue to view private RRSPs the same as they alsways have (as I described above). If this was the cxase, from a US tax point of view, these private contributions are more valuable, since the contributions ONLY will not be taxed later opon withdrawal.
Too soon to tell on that one.
So, if he has been contributiong to an RRSP in the past, with no US tax consequences, he probaly should continue to do so. Heshould use the employer sponsored RRSP to get matching, and look into income splitting by balancing out your RRSP with his.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing 
Thanks! I don't know if I followed all of that but I tried. So are you saying that when we go to withdraw from our RRSPs, they could be double taxed? If we retire in the US, does the RRSP stay here or do we "collapse" it, a term I have seen here?
I can't have my own RRSP because I don't have an SIN yet--still waiting on permanent residency. Although my husband's SIN is a temp one--if I got an open work permit, I could then get a temp SIN.
I can't have my own RRSP because I don't have an SIN yet--still waiting on permanent residency. Although my husband's SIN is a temp one--if I got an open work permit, I could then get a temp SIN.
Your RRSps will always be taxed by canada, since they are in canada, and will always be taxed by US since you are US citizens.
All your income is "double taxed" now; it doesn't mean you pay more tax, does it? It just means you report it in both countries.
The $30,000 threshold is the lowest tax bracket. There is not much point taking an RRSP deduction in the lowest tax bracket, since you will likely pay at ;east that when you take it out. You can contribute if yo uahve the money, just don't take the deduction until a future year.
You should be doing what you need to do to get an SIN
All your income is "double taxed" now; it doesn't mean you pay more tax, does it? It just means you report it in both countries.
The $30,000 threshold is the lowest tax bracket. There is not much point taking an RRSP deduction in the lowest tax bracket, since you will likely pay at ;east that when you take it out. You can contribute if yo uahve the money, just don't take the deduction until a future year.
You should be doing what you need to do to get an SIN
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Collapsing RRSP is done by those moving to US with many years of other income ahead of them.
Retirees have no need to collapse their RRSP, since they are in a position to draw these down slowly at low tax -- as was intended
Retirees have no need to collapse their RRSP, since they are in a position to draw these down slowly at low tax -- as was intended
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Think of it this way.
An RRSP contains money that was earned in Canada, but not taxed. Thus, Canada will tax that money when you take it out of the RRSP, regardless of your residence at the time of withdrawal.
An IRA/401(k) contains money that was earned in the U.S., but not taxed. Thus, the U.S. will tax that money when you take it out of the IRA/401(k), regardless of your residence at the time of withdrawal.
The tax treaty helps you avoid double taxation on the withdrawals.
An RRSP contains money that was earned in Canada, but not taxed. Thus, Canada will tax that money when you take it out of the RRSP, regardless of your residence at the time of withdrawal.
An IRA/401(k) contains money that was earned in the U.S., but not taxed. Thus, the U.S. will tax that money when you take it out of the IRA/401(k), regardless of your residence at the time of withdrawal.
The tax treaty helps you avoid double taxation on the withdrawals.
Arteeh
Actually, the foreign tax credit provisions of the respective tax cosdes are what prevent double taxation in this case, not the treaty.
The treaty merely states that what is considered pension income in canada is pension income in US, and vice versa.
Then the IRC and ITA take over.
The treaty merely states that what is considered pension income in canada is pension income in US, and vice versa.
Then the IRC and ITA take over.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Yes. It's not "extra" savings, since it will be a dedcution ogf yourhusbands taxes and will come off his contribution limit.
It just gets money into your hands.
This is not usually a big issue for amreicans due to joint filing, but in canada were there is no joint filing, and there are strict attribution rules, it is one of the simplest ways to income-split.
It just gets money into your hands.
This is not usually a big issue for amreicans due to joint filing, but in canada were there is no joint filing, and there are strict attribution rules, it is one of the simplest ways to income-split.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing
Foreign Tax Credit
NelsonA: [b]Actually, the foreign tax credit provisions of the respective tax codes are what prevent double taxation in this case, not the treaty.[/b]
I'm trying to get back up to speed again on this particular issue. Last year, it seemed that it was VERY difficult to use the foreign tax credit because you had to offset the tax with a particular class of other income (altho there was a plan afoot to reduce the number of classes of income for 2007.) I recall from discussions last year, tho, that most people had to settle for claiming the foreign taxes paid to Canada as an Expense item, rather than claiming it as a credit. Doing that, depending on your tax bracket, you only get about 25 cents on the dollar as a deduction, rather than a dollar for dollar deduction.
I remember you had set up something with your wife, Nelson, whereby you had some type of income in Canada, that allowed you to get a full tax credit. My goal for this year (2008) is to set up something to be able to claim the FTC.
I'm trying to get back up to speed again on this particular issue. Last year, it seemed that it was VERY difficult to use the foreign tax credit because you had to offset the tax with a particular class of other income (altho there was a plan afoot to reduce the number of classes of income for 2007.) I recall from discussions last year, tho, that most people had to settle for claiming the foreign taxes paid to Canada as an Expense item, rather than claiming it as a credit. Doing that, depending on your tax bracket, you only get about 25 cents on the dollar as a deduction, rather than a dollar for dollar deduction.
I remember you had set up something with your wife, Nelson, whereby you had some type of income in Canada, that allowed you to get a full tax credit. My goal for this year (2008) is to set up something to be able to claim the FTC.