IRA to RRSP transfer

[Domeani]

Looking to move an IRA to an RRSP before end of 2023 to simplify accounts. Have read a few iterations of Stuart Dollar's/SunLife documents over the years regarding the strategy. There seems to be some evolution. I have a few questions mostly, not all, about the US side of the equation. I'm a Canadian resident / citizen that worked in the US many years ago (no longer any ties), only for a couple of years, and have a rollover IRA from those days.

1. If the broker, appears to, allow the customer to set the withholding % what value should be set? It seems many default to 30%, years ago with a W8-BEN one could get to 15%, but this is not always the case. One would think the lowest is best, why not 10%? But then what can of worms does this open? Is it a broker or customer issue if the proper amount is not withheld?

2. Is filling a 1040NR a requirement when taking a lump sum IRA distribution if that is the only source of US income? My understanding is no but isn't the IRA subject to the same tax rates here - https://www.irs.gov/newsroom/irs-provid ... -year-2023 ? If the withholding is less than tax owed one would owe additional tax when filing a 1040NR? The opposite is if one is dinged 30% withholding then they can recoup some tax by filing a 1040NR, if applicable (ie. the overall tax on the lump sum is less than 30% total). Finally, is a 1040NR an absolute must to get an IRS 'transcript' to claim a FTC in Canada? In other words, the simplest is 15% withholding, no 1040NR, claim the 15% FTC in Canada, done. But I'm not sure it is that easy anymore. Are broker statements, slips, about withholding enough for an FTC in Canada?

3. Do Canadian pay the under 59 1/2 10% penalty? It certainly does not appear to be taken at source. If so, how?

[nelsona]

The IRS has become more strict over the years, and does not allow brokers the15% treaty rate for non-periodic withdrawals, and thus it is 30% plus penalty withheld at source. If they doubt at all that your withdrawl is periodic (yours of course would not be) they withhold at the maximum.

You can file at the end of the year to have the IRA included as regular income on a 1040NR if it yields a lower tax rate, but the 10% penalty would still apply. Whatever the final tax and penalty, both can be used towards your foreign tax credit on your Cdn return. If you don't file a 1040NR, the tax slip 1042-S issued by the broker should suffice, but the CRA can insist that you get as low a tax rate as possible.

Remember that for this strategy to work, you must (a) come up with not only the net IRA income you get, but also an amount equivalent to the withheld tax and (b) you must have about the same Canadian income or more as the gross IRA withdrawal during that year, so that the US tax credit can be fully used.

[Domeani]

Thanks so much for the reply.

I'll answer backwards:
On your third para - this is a year I can make it work for the totality of the IRA, might not be the case going forward. Both (a) and (b) are covered.

On your second para - then the rates here https://www.irs.gov/newsroom/irs-provid ... -year-2023 do apply? Fictitious scenario of $100k USD being taxable at $17.4k USD for 2023. If $30k is withheld then one should be refunded $12.6k from the IRS? What if 15% is withheld? Is $2.4k owed to the IRS and filing a 1040NR is required? Confusion here as it is often stated the withholding for an IRA lump sum covers taxes owing to the IRS and a return is not required to be filed if it is the only source of US income.

On your first para - what if the broker withholds 15% (even on a lump sum)? Or allows you to choose? My understanding was that 30% was the new normal and that one had to file a form 5329 to pay the 10% penalty. If, for whatever reason, 15% is withheld, a 1040NR is filed, and an a 5329 is filed to pay the 10%, would one owe income tax to the IRS on a $100k+ USD IRA to bump the 15% withheld to whatever is owed? Opposite of trying to get a refund. Does a 15% withholding create other problems? Why not just set the withholding to what the expected tax amount is?

Can one free file / e-file these forms as soon as Jan 1, 2024 rolls around, if they are required? https://www.irs.gov/e-file-providers/ef ... l-software . I would think I would and could resolve this asap on the US side as I would have all the numbers I need. It would be the only US source income for 2023.

Thanks

[nelsona]

As I said, you would only file a 1040NR if you were over-withheld or if it was advantageous to lower your tax rate (including the penalty).

As to what your withholding will be, your broker will decide this, and you will have little say about it. These days, they are leery of giving the 15%, as they could be found having made an error, and they would be on the hook (especially if you no longer have any account with them).

Whatever tax you do end up paying, you will be able to use the tax IF you have sufficient Cdn income. The less tax you pay in US, the more you will owe in Canada. The only issue with the withholding, is that for the scheme to work, you need to come up with the extra money.

[Domeani]

Thanks for the insights. If I am not over-withheld, tax-wise, don't I still need to file a 1040NR and form 5329 to pay the 10% penalty (if the early withdrawal penalty is not withheld)?

[nelsona]

You may find that even if you are withheld 30%, filing 1040NR will likely be less, even with penalty, if you report the income on Page 1 of 1040NR, rather than NEC.

[Domeani]

Apologies, I might not have written my last post clearly enough. If, for whatever reason, the broker only withholds 15% and nothing more, would I then be required to file a 1040NR and form 5329 to pay the 10% early withdrawal penalty?

[nelsona]

I would probably, since I would only be paying it after having completed the process, so would more easily come up with the 10% After all, if you do get dinged 10%, you will use it on your Cdn tax

Or you could pass, but would keep the 10% in reserve for future. .

[Domeani]

I should mention I understand that the less tax I pay in the US the more I will owe in Canada. It is all just a wash. I have the extra money set aside for this operation (ie. the IRA -> RRSP) to top up what is withheld. This is one year that I would be able to do this on a tax neutral basis (ie. broadly speaking: Canada income > gross IRA lump sum, for this year). This likely will not always be the case. I want to do the process correctly (ie. legally without causing any issue/penalty and have it be tax neutral) but also with the least amount of intervention needed (ie. why submit returns, if not required?).

For me tax neutrality works roughly around 20% tax + 10% penalty to the IRS (ie. if the combined total can be applied to Canadian/Provincial FTCs). 30% withholding + 10% penalty is more onerous and I cannot do it tax neutral in that case (ie. if I have to give up 40%). So either less tax is withheld (although it is mentioned brokers are leery of going below 30%) or I get a refund via a 1040NR. My preference, of course, is to withhold less.

If 15% is withheld, and later I file a 1040NR and form 5329 to pay the 10% penalty (my broker does not appear to withhold this amount either), then I would likely owe more tax. If that is the case am I on the hook to top up to whatever my tax owed is on the date of distribution, or face penalties like those mentioned here https://www.irs.gov/taxtopics/tc306 ? This is similar to an American not properly calculating their withholding on a W-4R. Or should I be fine to distribute now and submit my 1040NR/pay tax in January?

Finally it looks like I can’t ‘free file’ these forms myself - https://www.irs.gov/filing/free-file-mo ... -available , however, can I e-file https://www.irs.gov/e-file-providers/ef ... l-software them? The second link shows no ‘official’ providers. Is efile.com a plain vanilla option? Are there others? I’d rather just use the IRS site but it doesn’t seem possible.

Thanks

[nelsona]

You may have some estimated tax penalty, but it would be based on when you took the funds. There are exceptions, especially if you were not a taxpayer the previous year. I wouldn't fret about that.

Mailing your return should be enough.

[Domeani]

Any chance to e-file, rather than mail the 1040NR and form 5329? Even directly on the IRS website (free file)? If the former is possible, and not the latter, are there recommendations? The IRS site says there are official e-filer's but I don't find clicking around on their website - https://www.irs.gov/e-file-providers/ef ... l-software . Is e-file.com ok? TurboTax (US)? Others? It should be the simplest of forms/minimal entry.

What I want to avoid are situations mentioned here viewtopic.php?f=2&t=472604 . I think I should be able to file as soon as the form is available (Jan 2024?). I'll have all the information I need in 2023. There is no need to wait.

I was not a taxpayer last year. I haven't filed a US return for about 20 years.

Thank you for all your kind feedback on this topic.

[nelsona]

You'll have to find a provider that has BOTH 1040NR as an available form, AND allows foreign address to e-file.
Taxact is one that should work.

[Domeani]

Thanks for the Taxact suggestion. I think I might try this - https://www.irs.gov/e-file-providers/fr ... able-forms. https://www.irs.gov/instructions/i1040nr suggests this is doable. Looking at 2022 forms there aren't many entries:

1040-NR: Line 4a = 4b = Gross IRA distribution, Line 16 tax owing on Gross IRA amount, using marginal rates https://www.irs.gov/newsroom/irs-provid ... -year-2023 (I'll double check these with a second source), Line 17 10% penalty, Line 25g amount withheld by broker. Calculations in line 22, 24, 33, and 37.

Schedule 2: Line 8 and 21 (10% penalty)

Form 5329: Line 1,3,4 (10% penalty)

Provided one has figured out it is tax neutral on the Canadian side there isn't a lot of paperwork, or line entries, on the US side, provided it is the only US source income. Am I missing something? I don't see the real need to hire a US accountant for the US side return preparation.

[Domeani]

nelsona wrote:
> The IRS has become more strict over the years, and does not allow brokers
> the15% treaty rate for non-periodic withdrawals, and thus it is 30% plus
> penalty withheld at source. If they doubt at all that your withdrawl is
> periodic (yours of course would not be) they withhold at the maximum.
>
> You can file at the end of the year to have the IRA included as regular
> income on a 1040NR if it yields a lower tax rate, but the 10% penalty would
> still apply. Whatever the final tax and penalty, both can be used towards
> your foreign tax credit on your Cdn return. If you don't file a 1040NR, the
> tax slip 1042-S issued by the broker should suffice, but the CRA can
> insist that you get as low a tax rate as possible.
>
> Remember that for this strategy to work, you must (a) come up with not only
> the net IRA income you get, but also an amount equivalent to the withheld
> tax and (b) you must have about the same Canadian income or more as the
> gross IRA withdrawal during that year, so that the US tax credit can be
> fully used.

So I did withdrawal online in two steps, on the same day, as the system limits per transaction amounts. The first went out with 15% withholding and the second with 30% withholding. How bizarre is that. I'll call the broker to get a better understanding but what slips should I expect from them at the end of the year? The 1042-S only? Is there also a 1099-R or is that not applicable?

[nelsona]

You will get a 1042-S, since you are non-resident.

Likely they viewed your initial withdrawal as meeting their criteria for periodic, The second, when added to the first, did not.