penalties & fees cashing out RRSP

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penalties & fees cashing out RRSP

Post by cellis10 » Sun Nov 28, 2004 8:32 pm

I am a US citizen, who from 1990 until 1999 was a landed immigrant working in Canada. I returned to the US in 1999 and closed out all my Canadian financial accounts except for my RRSP. With the recent fall of the US dollar, it now seems like a good time for me to make some withdrawals from my RRSP. Before I do so, I want to fully understand the ramifications as far as penalties, taxes and fees.

I have read conflicting information. On the one hand, I thought if I withdrew less than $5,000, 10% would be withheld by Revenue Canada. There is a sliding scale, 20% for withdrawals between $5k and $15k and a max withholding of 30% for withdrawals of $15k and higher. I also read somewhere else that US residents simply have a 25% withholding regarding of the amount withdrawn. In addition to the withholding, I know I will have to report the funds on my tax return as earned income and pay tax accordingly to the IRS. The amount I report will be less any funds withheld by Rev Canada. Can you clarify and confirm my understanding and let me if I have missed anything? Thanks so much.

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Post by nelsona » Sun Nov 28, 2004 11:22 pm

All the 'sliding-scale' figures you refer to do NOT apply to you, because you are a NON-RESIDENT of Canada, and thus are subject to a FLAT 25% tax on all RRSP withdrawals.

In US you will report the ENTIRE RRSP withdrawal (including the tax withheld) as 1040 line 16(a) income. The ammount that is taxable (reported on line 16(b)) will be based on section 74 of IRS code, which in essence means that you will pay tax on all income over and above your original contribution made to RRSP. The tax you pay in Canada, or which is withheld, does NOT enter into how much income is reported in US.

Your Cdn tax paid would be used either as a tax credit (Form 1116) or as a tax deduction (Schedlue A) depending on which yeilds a lower US tax (in this and future years).

Just as a ballprk example, if you contributed US$100,000 to your RRSP, and it is now worth US$150,000, and you withdraw US$10,000, you would pay US$2,500 in Cdn non-resident tax, and would report $10,000 on line 16(a) of 1040.

On line 16(b) you would report US$3,333, that is
$10,000 x (150,000-100,000)/150,000.

Simply, a third of your RRSP is 'growth', thus you report 1/3of your withdrawal as taxable income.

You would then fill a 1116 (general limitation income) using the $2,500 against the $3,333 of Cdn income you reported. This would result in a sizable carry-over to be used in future years if possible.

There are other ways of calculating the amount of line 16(b) but the one outlined above is the one which most efiicetly meshed the US and Cdn tax rates.

<b>Oh, and one final thing</b>

Before you do any of this, be sure that you have correctly filed Rev Proc 2002-23 for the past 6-7 years, or IRS can (and will) come after you for not having reported your RRSP income in the past. You also had an obligation to report the existence of this RRSP to the treasury dept with TDF 90-22.1

<i>nelsona non grata</i>

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Post by cellis10 » Mon Nov 29, 2004 9:01 am

Thanks so much for the informed reply; it is extremely helpful. As I feared though, your answers have prompted new questions on my part. I will review your information thoroughly and post my new questions in a few days.

FYI, I have always filled out the form for the Dept of Treasury (even while I was living in Canada), but I'm unsure about Rev Proc 2002-23. I have a bad feeling about that one. When I first returned to the US, I had an accountant do my taxes and although I fully disclosed my RRSP to him, I don't think he knew what to do about it. Guess I have some homework to do. A co-worker of mine told me he cashed in his RRSP (it was only 4 figures) about 5 years ago and never reported it on his US tax return. Guess I should tell him to beware of the IRS knocking on his door, though there must be some statute of limitations on them coming after him.

Mark T Serbinski CA CPA
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Post by Mark T Serbinski CA CPA » Thu Dec 16, 2004 8:08 am

Just a point about the RRSP taxability.

1. In the example above, the entire $10,000 would be included in income in the U.S., and is subject to a foreign tax credit.

2. No foreign tax credit carryover is available for any income which is excluded from tax (if any such income were to exist).


Mark T. Serbinski, CA, CPA

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