Inheriting IRA from Canada

[sensfan25]

Hi,

I am a Canadian who recently inherited several IRAs to which I was named the direct beneficiary. Since I was named the direct beneficiary, the IRA assets are not being handled by the estate in question.

I have been told by investment companies that I need to submit a W-8BEN form in order to have the IRAs liquidated and sent to me in Canada, however, 30 percent of the funds are going to be withheld.

Does anyone know how I can avoid having 30 percent of these assets taken by the IRS? Am I eligible for exemption under a tax treaty?

Any guidance would be much appreciated!

[nelsona]

The W8BEN is merely a formality, it will not reduce the witholding because of the treaty, but the correct withholding is 20%. There is no 10% early withdrawal penalty on inherited IRAs, so the 30% level is incorrect.

Unfortunately by setting you up as the beneficiary, you are in fact taking this IRA withdrawal as income, and will have to report it on your Cdn return.

It would have been better for the estate to collapse the IRA and give you the proceeds.

Now, you will pay 20% in US, and whatever more in canada, with credit given for the 20% US tax.

You could always maintain the IRA active and delay the tax if you wish. You are not required to collapse it (although finding a willing IRA manager might be difficult).

This should have been better planned. It would have been wiser to give the IRAs to someone in US, and give you something else.

This is equivalent to a Cdn giving his RRSP to his kids (it would automatically be collapsed and taxed) rather than to his spouse (where it would rollover tax-free).