Large lump sum RRSP withdrawal - do I have this right?

[EOG]

Considering sizeable lump sum withdrawal of entire Canada RRSPs as US residents ($340k US) and have a couple questions before starting this with broker.

Canada tax residency ended (+ US began) in July 2017. At date of residency change, RRSP was all cash, to crystallize cost base, worth ~$250k US. Since then was invested and grew to current ~$340k US value.

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(1) from all the reading here and elsewhere, my taxable is $90k and my cost base $250k non taxable. Is this still true despite some interpretations of Rev Proc 2014-55 that the entire distribution is US taxable due to the example given in that Rev Proc document (eg see https://www.linkedin.com/pulse/problems ... -roy-berg/)

(2) We are in NY so would owe state tax on this too, will that state tax be on just the $90k or full $340k?

(3) So overall if I have it correct: 25% NR tax on $340k to Canada, US fed tax on $90k, NY state tax on $90k? (And claim FTC at federal level….can I do so for NY too?)

(4) RRSP are currently invested w/ 55% USD, 45% CAD denominated assets. To minimize losses from FX conversion, can I elect that our broker keep things in kind and pays the 25% non-resident tax owing all from the CAD side of account? (and whatever CAD left over gets added to US cash and paid to my USD bank account?). Or are they required by law or policy to convert everything to CAD for a withdrawal/closing, then pay out remainder after non resident tax as CAD (leaving me to convert all of it to US afterward)
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I appreciate your help even if these have been covered in disparate posts already. Want to ensure I am looking at this through a Fall 2023 lens and not outdated info, as $340k is not an inconsequential amount. (Tried to model this in TurboTax 2022 and looks like it would be $43k extra tax Fed/NY if the entire $340k distribution is considered US-taxable, which would influence if we do it now or not)

[EOG]

can't edit post (?) but wanted to add that we will be itemizing ( = not taking standard deduction) for our 2023 US tax filing.

[nelsona]

1,2. Nothing has changed. Only-post arrival RRSP growth is taxable in US (and NYS). The example in the Rev Proc applied narrowly to employer-sponsored RRSPs, where the contributions were deductible in US. If your RRSP was not made up of such an employer-sponsored RRSP or pension, you are fine.

3. Correct. NYS will NOT give any credit. You should also consider using the NR tax as a Schedule A deduction rather than using a 1116 credit. This may reduce your total tax liability than the credit. It will certainly reduce your NYS tax. This may trigger AMT, so be sure to use software to do your evaluation.

4. That would be for your broker to determine.

[EOG]

Ok thanks for clarifying (especially on pts 1&2). RRSP was just self-directed (then broker managed), not employer-sponsored/pension.

For my figures, just to simplify, based on how you have instructed in other threads:

On form 1040:
* $340k to line 5a (pension)
* $90k to line 5b (taxable pension)

then,
Option 1: Schedule A itemized deduction
* $85k foreign tax to line 6 on Sched A

Option 2: Form 1116 if taking credit (and no Schedule A deduction)
* $90k foreign income reported Part I (since $90k US taxable of the $340 total withdrawal, balance being cost base when we became residents)
* $85k foreign tax reported in Part II (full amount)...Turbotax automatically figures how much is applicable.

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I tested this in 2022 return (similar income to 2023e), when I filed MFJ with w/ ~$335k AGI. For that year, Option 2 was optimal. $90k US taxable from RRSP = 21% of worldwide taxable income, so $18.6k as foreign tax credit, in total on the $340k withdrawal would pay $10.8k US fed, $6k NYS, and $85k tax non-resident tax to Canada (at source), so keep basically $238k net after all three tax collectors get a piece. This makes sense to me as the incremental US fed tax is ~12% rate on 90k (benefiting in part from FTC on what I have paid to Canada) and NY state 6.7% (~ marginal rate).

Trying 2022 as Sched A deduction less favorable: $231k net in pocket, due to resulting effective US rate 21% (since no FTC) though NYS rate 5.4%. As noted above I did standard deduction in 2022, as expect to itemize 2023 will definitely run both as Schedule A works out better.

Overall using my 2022 figures my total tax paid fed+state(+Canada) would be ~30% as FTC credit route, ~32% if itemizing, so roughly comparable or better than if we were still back in Canada and drawing it out as retirement income. Maybe a few points higher than if I pulled it out as US retiree (or as RRIF) but I hope to make up the difference saving on MER due to it being advisor-managed now.

One further question: What is acceptable source of FX rate to convert that 2017 RRSP cost base on date we became US residents? (The RRSP was fully CAD at residency change date.) I have used US Treasury Board as source in tax filings and FBAR etc. but they only report quarterly and this residency-change date is mid-year (and not a quarter end)...do I just use the closest quarter-end from Treasury or is there some other IRS source? Thanks again!

[nelsona]

You can use bank of Canada daily rate if available. IRS isn't stickler on that.

[EOG]

Thanks on FX. Was the methodology correct (which amounts on which forms/lines) as I wrote above?

[EOG]

And am I supposed to include anything to substantiate the rrsp (cost base, FX rates etc) with the US tax filing or just have on hand if ever queried on it? (Not sure how to append it to Efiling anyhow.) thanks.

[nelsona]

IRS almost never wants anything submitted with the return. Keep these for any IRS questions.

[EOG]

ok thx, and the methodology (which amounts on which forms/lines) as I wrote above, it all seemed to make sense I didn't have the wrong amount on the wrong form etc for this transaction?

[nelsona]

I think you have enough to go on. Software does taxes.

[EOG]

agree to a point, the software is only as good as its inputs (even if there are just 3 of them: pension, taxable pension, foreign tax).

First time through I mistakenly put the full $340k as Part I income on 1116 (not the $90k US taxable amount) that made the FTC credit totally wrong resulting in an overly generous refund. When Turbotax said the US was going to refund me $43,000 for the transaction, something seemed just a tad off...

[EOG]

One more important note: we have not been NY taxable the whole time since moving Canada > USA. Were in state with zero state income tax 2017-2022, only moved to NY during 2022.

I know for employment income, NY tax applies only to income earned while one was NY taxable. The account has only made about $2k of income since our move to NY using a second interstate ‘cost base’ for the move to NY.
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E.g. RRSP values at pertinent dates:
2017 –$250k USD @ move date, Canada > US, to a state with no state income tax (= Fed cost base)
2022 –$338k USD @ move date > to NY (= NY cost base)
2023 – $340k USD lump sum withdrawal

FEDERAL TAX = on 2017-2023 income ($340 lump - $250 cost) = $90k income subject to federal tax
NY STATE TAX = on 2022-2023 income ($340 lump - $338 cost) = $2k income subject to NY state tax
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Is this approach correct, taking filing position that only RRSP 'income' earned while a NY resident is taxable there (= $2k income) ? Or is the NY taxable income the same as federal (= $90k income)? The difference is worth ~$6k in NY state tax, thanks.

[nelsona]

Each state is slightly different, and I don't delve into particular state tax issues, but generally there is a "part-year' return that you file in your first and last year in a particular state.

Pension income doesn't care about when growth occurs, it cares when income is taken in your hands. If you trigger the taxable income while in NY, you likely have to report that income on your NYS return. NYS will be relying on your income reported on your federal 1040 and will expect you to account for each type of income and source.

You can probably contact NYS taxation for a definitive answer if you cannot find it online.

Btw, NY does not accept any of the Cdn NR tax as a credit or dediction.

[nelsona]

Since it appeards you will file a full year NY tax return, ALL the federally taxed income will be reported and taxed in NY.