Converting an IRA to an RRSP (US citizen, CAD PR)

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FLbiker
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Converting an IRA to an RRSP (US citizen, CAD PR)

Post by FLbiker »

Hi. I'm a US citizen and a Canadian permanent resident. We moved to Canada last year, and most of our investments are still in USD. I've got a decent-sized 403b, and I'm thinking I'd like to roll some of it over into an RRSP (by first converting it to a traditional IRA). My goal is three fold -- 1) I'd like more CAD exposure, 2) I like the pension splitting option of an RRIF and 3) I'd like to get rid of the age restriction that my 403b / IRA would have.

I've read a fair bit on this, and I *think* I understand it. Basically, to avoid double taxation, I need to owe enough Canadian tax on my other income (e.g. my salary) to offset the foreign tax credit I'd earn on both the withholding tax from the IRA and the early withdrawal penalty (I'm under 59.5).

To be more concrete, let's say I rolled $50,000 CAD from my tIRA to my RRSP. I would have a withholding tax of 15% ($7,500) and an early withdrawal penalty of $5,000 so I would get $37,500. I would top that up with $12,500 and put the total $50,000 into my RRSP. And I would get a foreign tax credit of $12,500, which I would use to offset taxes owed to the CRA. Thus, as long as I owed more than $12500 in CAD income tax, I wouldn't be double taxed. Is that right?

Thanks! And if you need any other information from me, please don't hesitate to ask.
nelsona
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Re: Converting an IRA to an RRSP (US citizen, CAD PR)

Post by nelsona »

Your 403b is eligible for pension splitting as is. Converting it to an IRA removes that possibility.

Since you are a US citizen, it is not the withholding that is the tax, but the tax determined on your 1040, which is likely less, plus the penalty.
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nelsona
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Re: Converting an IRA to an RRSP (US citizen, CAD PR)

Post by nelsona »

Not sure what you mean by age restriction but RRIF mandatory payments are similar to US RMDs.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
nelsona
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Re: Converting an IRA to an RRSP (US citizen, CAD PR)

Post by nelsona »

Remember that oncde it is in the RRSP world it will be forever taxed in Canada. There is no similar mechanism in the other direction.

If you leave it in US and return there someday, it will not be taxed in Canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
FLbiker
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Re: Converting an IRA to an RRSP (US citizen, CAD PR)

Post by FLbiker »

nelsona wrote:
> Your 403b is eligible for pension splitting as is. Converting it to an IRA removes that possibility.
>
> Since you are a US citizen, it is not the withholding that is the tax, but the tax determined on your 1040, which is likely less, plus the penalty.

Thanks! This is extremely helpful. I didn't realize I could do pension splitting on the 403(b). That leaves me with two potential reasons -- having more investments in CAD and losing the age restriction. And I feel like the tax on my 1040 would be higher than the withholding tax, as my marginal rate in the US would be 24%. ($80,000 salary + $50,000 IRA rollover) Or am I misunderstanding this?

nelsona wrote:
> Not sure what you mean by age restriction but RRIF mandatory payments are similar to US RMDs.

I wasn't talking about RMDs, but the 59.5 requirement for penalty free withdrawals. I'd like to be able to make withdrawals earlier. I'm also considering SEPP as an alternative.

nelsona wrote:
> Remember that once it is in the RRSP world it will be forever taxed in Canada. There is no similar mechanism in the other direction.
>
> If you leave it in US and return there someday, it will not be taxed in Canada.

Good point... Right now, the plan is to stay in Canada, but I don't know the future. We just have so little of our retirement investments in Canadian dollars...

Thanks a lot for these points, you've given me some more to think about...
nelsona
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Re: Converting an IRA to an RRSP (US citizen, CAD PR)

Post by nelsona »

your tax is determined by EFFECTIVE taxrate, not marginal. In any event, you have to file a return, and the tax will be determined on that basis.

When this arrangement was first confirmed by CRA, they stipulated that periodic withdrawals like SEPP payments are not allowed to be used as RRSP transfers. You would need contribution room.

Most RRSP holders do not have much in CDn investments as you may think, even if held in canada. Not much to gain there.

Please don't use the quotes, they are confusing and annoying (to me). I know what has been written.

As to RMds, you are already deciding to pay the penalty when withdrawing using this method, so this shouldn't be a concern. Your US tax will always be lower than your US tax plus any penalty.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
FLbiker
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Re: Converting an IRA to an RRSP (US citizen, CAD PR)

Post by FLbiker »

OK, thanks for this. I'm talking to my tax accountant tomorrow to see what he says, but it sounds like he also doesn't think it's worth it.

And when I referred to considering SEPP, sorry for not being clear -- I wasn't going to do SEPP to get money into my RRSP. I was just going to use it to get access to my 403b before hitting age 59.5.

Thanks!
nelsona
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Re: Converting an IRA to an RRSP (US citizen, CAD PR)

Post by nelsona »

You have access to your 403(B), its just that you have the penalty. By doing the transfer, you are already agreeing to pay the penalty. Your 403(b) admin nor IRS will consider this maneuver a transfer to a qualified retirement account, so will not exempt it from the 10% penalty.

The ones that push this transfer are Cdn brokers who want to get their hands on that money to generate some income for their firms.

If you were not a USC, it *might* make more sense, but even less so since you are a USC.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
FLbiker
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Joined: Sun May 30, 2021 11:44 am

Re: Converting an IRA to an RRSP (US citizen, CAD PR)

Post by FLbiker »

Perfect, thanks! What you've told me is exactly what my tax accountant said. So I think what I'm going to do is leave stuff as is, and then potentially shift some once I'm 59.5 to get more CAD exposure. Learning I could do pension splitting with the 403b was a very welcome surprise as well. Thanks!
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