Traditional IRA to RRSP Conversion

[rdneu_56]

How would a Canadian residing in Canada go about converting a traditional IRA account to a RRSP in Canada? The basic framework seems simple:

- Close the account or take a partial distribution.
- Pay US taxes and 10% early withdrawal penalty, file 1040 NR etc.
- Take what's left and add in what the IRS took in taxes and penalties from Canadian funds and contribute that to an RRSP. This should result in zero Canadian taxes for the transaction.
- Take a foreign tax credit for the taxes paid to the US on one's Canadian return.

This leaves one sitting on a the 10% penalty paid to the IRS, unless this penalty can be claimed as a foreign tax credit. It would be nice, but I think this is not possible or is it?

Is there another way to deal with the penalty, in order to avoid a loss?

[nelsona]

The penalty is not eleigible for foreign tax credit unfortunately.

Also, to get credit for the Us tax, you must have sufficient other Cdn income to run up a high enough CDn tax bill to use the US tax: Roughly the amount of your RRSP deposit.

The only way to reduce the penalty is to incur ceratin expenses that would qualify some of the withdrawl as penalty-free (tuition, first hoem, medical..). Otherwise the best thing is to leave it alone until you retire, or return to US and convert to Roth.

This highlights the importance of Cdns now residing in US to roll their IRA etc into a ROTH before leaving.