RSP - Withdraw only the cost basis?

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ski-matic
Posts: 19
Joined: Tue Oct 27, 2009 11:33 pm

RSP - Withdraw only the cost basis?

Post by ski-matic »

Hello!

I'm aware that as a US resident there is a 25% withholding on the Canada side. I am also aware that the cost basis should not be taxed in the US, but the gains would be taxed as income.

When I moved to the US I had roughly $69,000 invested in my RSP with a cost basis of $67,000.
At a later point in time I moved it to a different brokerage where it is currently valued at $102,000.

1) Can I withdraw $67,000 from the RSP (resulting in $50,250 after 25% withholding), and then transfer that to the US with no income tax due in the US? (since that was the amount of cost basis when I moved)

2) If so - then everything that would remain in the account would be taxable as gains in the US and I could withdraw those in the future, correct?

3) Can it be done this way, and if so, any tips on how to report this when filing taxes?

Thanks for any help!
nelsona
Posts: 18314
Joined: Wed Oct 27, 2004 2:33 pm
Location: Nowhere, man

Re: RSP - Withdraw only the cost basis?

Post by nelsona »

Technically you can.
There are three ways to divvy the taxable portion on a withdrawal. As long as you consistently use one of them for all RRSP/RRIF withdrawals

You can:
1. Proportionally balance the taxable and non-taxable amount of the withdrawal. This balances the US tax with CDn tax each year you withdraw. This is by far the best way if you are going to take periodic distributions over a lifetime.

2. Front-load the taxable portion. This method is in line with the wording of the treaty, but usually leads to more US tax being paid with insufficient Cdn tax to cover.Not recommenced

3. Front-load the non-taxable portion (your question). This is much like early Roth withdrawals are handled. This of course gives you a HUGE CDn tax credut that you cannot use the first time you do it, but which can be used as a deduction in that year, or spread as a credit over future 10 years of taxable withdrawals. You could use this if you are thinking of leaving US and returning to Canada, and want to pay as little tax on your RRSP as possible that year, and then leave.

Is there a particular reason you wish to delay the US tax? Are you expecting your US income to drop substantially? (in which case I may just wait to take withdrawals in any event.

As with all RRSP withdrawals, you report the gross amount on the gross pension line, and the taxable portion on the same line.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
ski-matic
Posts: 19
Joined: Tue Oct 27, 2009 11:33 pm

Re: RSP - Withdraw only the cost basis?

Post by ski-matic »

Thanks for the quick reply!

Regarding the three options you mentioned - it sounds like how much taxable vs. non-taxable you want to withdraw is basically just determined by changing the gross amount and taxable portion on the pension line then?
It sounds like it's basically up to oneself to keep track of taxable vs non-taxable and to provide proof if an audit were to take place?

You are correct - I am looking to delay the US tax because I expect income to drop substantially in the future (probably next 5-10 years).
The reason I'm considering withdrawing the non-taxable portion sooner is because I may have a need for some extra cashflow.

When withdrawing the non-taxable portion I suppose I was ignoring the idea of a tax credit since the US wouldn't be taxing the cost-basis. I figured this would be more important with the taxable gains portion to prevent double-taxation.
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