IRA or RRSP for withdrawals

Returned to Canada · Post by **Returned to Canada** » Fri May 20, 2011 1:51 pm

Hello:

I have recently retired here in Canada with both an IRA and RRSP. I am 67 years old, while my wife is 65. I am a Canadian and not a US citizen. I have no taxable account funds to speak of, and only CPP for me and my wife for other income. My question is, if I need to withdraw $65,000 per year from my accounts to live on going forward, should I be more inclined to pull it from my RRSP or my IRA or would I be "tax" indifferent, thanks. My wife has no assets to draw upon, incidentally.

nelsona · Post by **nelsona** » Fri May 20, 2011 3:29 pm

This is a great question.

You will of course be both be getting some OAS and at least you will be getting SS, as well so keep that in mind.

Remember too, that your OAS will be subject to clawback if you exceed certain income levels, so you want to avoid that.

If you were A lot would depend on how big your two "pots" are, as eventually they would be subject to minimum withdrawls, based on a percentage of the funds you hold. what do you have?

RRIF income is splittable, IRA income is not.

It is difficult to maintain an IRA in US while living in Canada.

No Roths in your portfolio?

Fill in some of the info above while I mull this one over ....

One thing for sure though is that it would be best, while you can, to have as much income in any year come from one side of the border OR the other, which would lead me to think that using ONE the the OTHER would be the best strategy, at least until you need to make minimum withdrawals.
So I would start with draining the smallest one while not touching the other.

More later, after you provide more info.

nelsona · Post by **nelsona** » Fri May 20, 2011 3:38 pm

The reason I say to try to make the income come form one side of the border is the way foreign tax credits work: foreign income is taxed at your marginal rate, but the tax is credited to you at your effective rate.

with 65K of income, both your marginal and effective rate are going to be pretty high, so the flat 20% tax you will pay on IRA withdrawals should all be eaten up on your Cdn return, so that would make it taxed the same as RRSP.

The problem you face is not having any non-taxable wealth, and having it all in your name.

Returned to Canada · Post by **Returned to Canada** » Mon May 23, 2011 5:55 pm

My RRSP is 800K and my IRA is 300K, and we have no Roths, if that helps. All in my name except 30K of the RRSPs which is in my wifes name. Thank you very much for your help in this matter.

patti · Post by **patti** » Tue May 24, 2011 8:35 pm

"....flat 20% tax you will pay on IRA withdrawals..."

FYI, I think the treaty withholding rate for IRA withdrawals by a Canadian resident is only 15%. (Not that this changes the recommendation, but just wanted to be accurate.)

See page 39 in pub 515:

http://www.irs.gov/pub/irs-pdf/p515.pdf

nelsona · Post by **nelsona** » Tue May 24, 2011 9:19 pm

the 15% applies to periodic withdrawals. Our discussion was on quickly drawing down IRS, more that the required, which would attract higher taxrate.

nelsona · Post by **nelsona** » Tue May 24, 2011 9:22 pm

So, you have SS coming to you too, as well as CPP and OAS, so you will want to be drawing less than 65,000 or pay high tax when they clawback OAS.

I would probably sugget aternating for year to year.

And I would be trying to get as much funds in spouses name as possible.

nelsona · Post by **nelsona** » Wed May 25, 2011 6:11 am

Just on the IRS tax on IRA withdrawals: regardless of the final ammount, it will be less than the tax in canada, so will all be used up as FTC on the Cdn return, which is what you want.

Returned to Canada · Post by **Returned to Canada** » Thu May 26, 2011 12:26 pm

Thanks again, Nelsona. I hate to ask this, because you have been so helpful already, but, could you briefly explain why alternating withdrawals between my RRSP and the IRA would be to my advantage? As well, it looks as if I am going to have $50,000 in income this year in exchange for executor duties I have performed. Does that affect any of this? Thanks, again.

nelsona · Post by **nelsona** » Thu May 26, 2011 1:13 pm

Obviously in years when you are going to get other income, you will not need much pension income.

I've explained the 2 important points you need to keep in mind:

1. If you exceed a ceratin yearly income, you will have your OAS clawed back, making your marginal taxrate exceeding high. Its currently in the 65K range where this kicks in.

2. Foreign tax credits on the Cdn tax return work such that your foreign income is taxed at your marginal rate in canad (say 45%), but the credit will max out at your effective rates (say 20-25%). The credit will work out best if either almost all or almost none of your income is foreign. It works out least fovourably when the incokme is split between non-foreign and foreign.

So, while you have the option (ie. you are not forced to take minimum ammounts from either IRA or RRSP/RRIF until after 70) you should try to take income only from only one account in the year.

ExpatAmerican · Post by **ExpatAmerican** » Wed Jun 01, 2011 11:51 am

Hi Nelsona:

I appreciate your breadth and depth of knowledge on many of these cross border issues raised here. If you are an accountant interested in new clients, please email Olga at okrylova@blackmont.com.

Thanks

ExpatAmerican · Post by **ExpatAmerican** » Wed Jun 01, 2011 2:51 pm

Just wondering, do IRA distributions qualify as pensionable income for purposes of income-splitting (for a Canadian tax resident) like RRIF income would?

nelsona · Post by **nelsona** » Wed Jun 01, 2011 2:56 pm

It is my understanding that IRA distributions do not qualify for income splitting. They do not qualify for the pension amount either, and from what I read, this is the first criteria for being eligible for slitting.

ExpatAmerican · Post by **ExpatAmerican** » Wed Jun 01, 2011 4:08 pm

So, then in this particular instance (he with large RRSP and IRA, and her with very little), might you suggest meeting their income needs instead with a partial RRSP-to-RRIF conversion now, say $60K per year, and use those RRIF funds to generate income over time, as those funds could be income-split between the 2, and keep the IRA distributions deferred (and de minimis) for as long as possbile, given that they will always be taxed at his own rate (no splitting allowed)?

nelsona · Post by **nelsona** » Wed Jun 01, 2011 4:22 pm

Yes, this would get some income into her hands.

I would look into the clawback provisons to make sure that the income that is used to determine clawback takes the split income out of the calculation. it very well might, I have not checked.