Inherited IRA - Dual Citizen Living in Canada

zach · Post by **zach** » Tue Apr 05, 2011 4:59 pm

Hello everyone,

My sister (28) and I (26) have recently inherited an IRA from our father of ~$300k. My father had inherited the IRA from his mother, who had already begun taking distributions.

We both have dual citizenship and are currently living in Canada.

Our financial advisor at UBS has given us two options:

-Transfer the IRA to an RRSP here in Canada.
-Liquidate the IRA and receive a check.

These both sound like bad choices to me, as I know enough to be aware of the huge tax implication that both of these options would result in.

It was my understanding that the best option would be to keep the money in the US by transferring it into an account in my father's name, with me as beneficiary (though it would actually have to be split 50/50 into two accounts for my sister and I) and then take the required minimum distributions.

Am I correct that this an option?

Thanks in advance for any insight,
Zach

nelsona · Post by **nelsona** » Tue Apr 05, 2011 5:13 pm

There is no way to "transfer" the IRA to canada without incurring US tax. So, even if you could bring it to canada, it would be minus withholding tax.

And if you were to decide to put it your RRSP, I believe it would first need to be your IRA, and thus you would have to declare the income from the collapse in canada as well.

If you are going to bring it to Canada, have it collapsed by your father's estate, and just take the cash. Forget about RRSP transfer.

Your alternative sounds better, but will still result in Cdn taxation of the entire amount over time, including the growth. taking it all now, atleat gives you the chanceto invest it in lower taxed vehicles like your homes, or TFSA or tax-managed funds.

nelsona · Post by **nelsona** » Tue Apr 05, 2011 5:17 pm

Just so we're clear. ANY move that takes this out of an IRA of some form (either by collapse or by periodic withdrawls) will result in immediate US taxation, and possibly penalty.

If you lived in US, I might suggest putting it in a Roth, but you should not do that as a Cdn resident.

ExpatAmerican · Post by **ExpatAmerican** » Mon Apr 11, 2011 2:14 pm

I believe that there would be another, more preferable alternative than the two given to you from UBS (both of which would be "tax heavy"), and that would be for you to open beneficiary IRAs as non-residents. You could spread the distributions over a much longer period, which could reduce your tax liability as well. Darrell Thompson at Macquarie Private Wealth Corp. can help you in this matter. He can be phoned toll free at 866-775-7704 or emailed at darrell.thompson@macquarie.com

nelsona · Post by **nelsona** » Mon Apr 11, 2011 5:38 pm

They are NOT non-residents, since they are USC's.

ExpatAmerican · Post by **ExpatAmerican** » Mon Apr 11, 2011 5:50 pm

My mistake. Pershing LLC, division of BNY, who Macquarie clears through, sees no issues with this client opening a beneficiary IRA as a solid third option to UBS alternatives.

nelsona · Post by **nelsona** » Mon Apr 11, 2011 5:53 pm

Which is exactly what the porter came up wth on their own.

I would still be suggesting merely taking the money, having it taxed ONLY in US (the beneficiary IRA would incur Cdn tax), since they are years away from retirement -- and can find better tax savings in other vehicles.

ExpatAmerican · Post by **ExpatAmerican** » Mon Apr 11, 2011 6:10 pm

I was just trying to make the point that the third option (that he seemed to favor), is available to him, albeit seemingly not from UBS. Suggesting someone that can deliver said option would seem reasonable.

nelsona · Post by **nelsona** » Tue Apr 12, 2011 7:09 am

I think that had already been established in his first post, but thanks for the reaffirmation.

zach · Post by **zach** » Wed Apr 13, 2011 11:50 pm

Thanks so much for the replys nelsona and ExpatAmerican!

We have spoken more with UBS and they apparently were unaware of the third option (which seems strange), but now they are aware and willing to create new beneficiary accounts for my sister and I.

Nelsona, I'm interested in your suggestion of taking out the IRA in one lump sum. I was not aware that this could be done without paying Canadian tax. Could you elaborate on this?

Thanks again for the info! We are going to see an accountant next week and this has given me a lot of ideas for questions to ask.

nelsona · Post by **nelsona** » Thu Apr 14, 2011 5:59 am

Make sure that the estate closes the IRA. The estate is not Cdn resident, this no tax should be due in canada on this. There should be no penalty in US either (I believe) for such a collapse.

ExpatAmerican · Post by **ExpatAmerican** » Thu Apr 14, 2011 2:37 pm

I might also suggest that you get in writing that UBS will not pester you about your Canadian residency, as they have been doing the last 4 months to other IRA account holders in Canada. I might also ensure that they will allow you to make trades in the account, as necessary.

nelsona · Post by **nelsona** » Thu Apr 14, 2011 2:42 pm

Expat,

Do you know why so few firms want to deal with (or so many want to wash their handsof ) this issue, when it seems there are little no regualtory stumbling blocks?

It doesn't seem to matter whether the account holder is a US citizen or not, nor how much/little they have in the account? They just don't wnat to be bothered.

In any event, it's good for your firm....

ExpatAmerican · Post by **ExpatAmerican** » Fri Apr 15, 2011 10:56 am

It's a good question. US securities laws require the firm and the individual broker to be licensed in the jurisdiction of the account holder. It's all about residency. Citizenship is irrelevant, although very relevent for IRS tax purposes! So, when a US "tax-resident" (a more apt description) moves to Canada, any "qualified plan" (IRA, 401K, 403b, etc.) that he has would have to have a broker and firm that are licensed in the particular Canadian province of the account holder, as well as FINRA-licensed for the (US) qualified plan account.

The reason that virtually none of the US firms are licensed to do this business just comes down to cost vs. benefit. They feel that the costs associated to do it is onerous compared to the amount of revenue that they would realize. Canada is a very small country compared to the US. Same reason that you see very few US brokerage firms with any sizeable footprint in Canada. They consider it too small.

On the other hand, I have seen many, many former US residents that are (illegally) using US address' while living in Canada. So the cynic in me might suggest that they (the US firms) do not bother to get licensed since they are still enjoying much of the fruit (revenue stream) of these foreign accounts without the cost of getting licensed there. It's not worth getting licensed for the few (now Canadian residents) that actually want to hold their accounts within the legal construct of securities laws of both countries (a.k.a. use their actual Canadian address).

One last comment. By and large, Canadian securities laws also dictate that the (IRA) plan assets (securities in the account) must be approved for ownership by Canadian residents. Most open-end US mutual funds do not qualify.

nelsona · Post by **nelsona** » Fri Apr 15, 2011 1:11 pm

One of the reasons of course, that there are a number of former US residents that use a spoof US address is that this attaches no risk of additional US taxation, which is not the case for former Cdn residents, who must be more diligent in ensuring that all thier residential affairs point outside canada. They need to be more transparent than former US residents, since it could affect Cdn taxation.

Your "last comment" raises a question for me. If most US mutual funds are off-limits for IRAs of Cdn residents, and I'm quite sure that Cdn mutual funds cannot held in an IRA (?), does this mean that IRAs held at firms like pacifica and macquarie, etc, by Cdn residents can't invest in any mutual funds?