LIRA Question Related to RRSP Distribution and Tax Calcs

[michaelthef]

Hi nelsona – question regarding RRSP. Wife got letter from itrade asking that account be shut down / moved now that we are US residents. Some of the account is LIRA – what’s the best approach? Would another brokerage in Canada actually allow us to open the account to effect the move since we already have left Canada, and even if they would, aren’t there substantial fees to transfer an account (several hundred dollars)? This might be a good opportunity to do what you have suggested in the past which is to take out the $ and move to the US. But given that some is LIRA, and I read there is a 2 year requirement to be out of Canada before this can be unlocked, we can’t do so at the moment, right? So wondering what happens to the LIRA portion in this case?

Also, do you mind confirming the math below?

$65k RRSP balance x 25% = $16.25k of tax to Canada
$16.25k tax credit used as foreign tax credit to offset US taxes 1 for 1
Tax basis of RRSP was 60k when leaving Canada last year but market value was 55k. Has now appreciated to 65k. So sounds like when taking this distribution while a US resident, that there is only tax owed to the US on $5k given that the RRSP grew back to equal the tax basis and then surpassed it by 5k while we were residents of the US.

So net net, RRSP would result in $48.75k distributed to us and the $16.25k of tax reduces our 2014 tax bill directly by $16.25k. And then I would in addition to this pay takes of $5k x my marginal US tax rate.
So if this is the case then it feels like to some extent there is a double taxation on the $5k piece. Am I thinking of this right?

Thank you!

[michaelthef]

To clarify - about half of this is LIRA, and the other half is regular RRSP. Thank you.

[michaelthef]

Apologies - reading this post makes it clear that there is a distinction between LIRA treatment and regular RRSP treatment that I ignored in the description I laid out in the original post.

http://forum.keatsconnelly.com/viewtopic.php?f=11&t=98

If you don't mind, would you be able to help me think about the above described situation in the event that what I described was 100% LIRA and as a separate hypothetical scenario, 100% self funded RRSP. I think looking at each situation separately would help establish what makes most sense to do.

To be clear, retirement is many many years away so not sure the RIF option works for the LIRA case.

[nelsona]

TD waterhouse will take over new clients whop have moved to US. Only for RRSP/LIRAs and RRIF/LIFs however. Non-sheltered accounts cannot be opened.

Mine as transferred without any fees. I never had fees to transfer RRSPs from one account to another while in canada or outside.

as to what happens to the LIRA: iTrade cannot force you to take the LIRA in cash, since they are simply not allowed to release these funds to you (locked-in applies to both the trustee and the client) . They can however force you to move these funds into non-securities while waiting for you to find a new broker. they could liquidate and give you your RRSP monies, less tax of course, which may not be what you want them to do.

You simpy need to find another broker.

I will not go through the tax calculations other than to say this:

100% of any LIRA distribution (before tax), be it lump-sum or periodic, will be included in your US income. The NR tax, be it 15% or 25% can be used as a foreign tax credit.

Only xx% of your RRSP distribution (before tax) will be includabel in income on your 1040, based on the book value when you arrived and the current FMV. I've gone through this enough on this forum.

And foreign tax credits are rarely 1 for 1. Form 1116 credits foreign tax on an effective (average) tax basis, while the foreign income is added at one's marginal rate. So unless all your income is foreign, or the foreign tax is at a lower rate than your effective US rate, which would not be the case for either a 15% or 25% NR taxrate.

Any income that you earn in one country while resident of another country is "double taxed". What is important is that one country give you some form of credit (in this case, the US).

[michaelthef]

Thank you. Will move itrade to TD Waterhouse.

Regarding the RRSP withdrawal question, I have read through a variety of posts where you discuss withdrawal strategies. You have pointed out in the past that withdrawal should be done right when you move or convert a RIF. Does it ever make sense for a young person (sub 30) convert to a RIF? Does that mean you can withdraw over time immediately or need to wait until above a certain age?

And yes I see that only the difference between FMV and BV at the move date will be included as income in the US and be taxed at the marginal rate.

Ultimately what I am trying to figure out is I moved 1 year ago from Canada and wondering if best thing to do is collapse RRSP and bring money into the US today or leave as is and let it grow for next 30 years in Canada. RRSP has appreciated a bit over the year and now is above the book value by a few thousand. Income booked in US should still be quite low. Having a tax deferred vehicle is in and of itself valuable since there are limits on size of those vehicles that can be created in the US right? So for example since there is a 401k limit, an IRA limit, a roth limit, etc., then seems to me that collapsing the RRSP is in some sense giving up some value since you are “breaking downâ€￾ the vehicle that allows for tax free accumulation and it’s not easily replaceable.

Long term plan is to remain in US but as always never know. Trying to figure out how that decision (ending up in US or ending up in Canada might affect the decision).

[nelsona]

Once you convert to RIF, you may begin -- after waiting one full year -- to take 10% of the value at 15% tax. You will never do better than that.

Otherwise collapse. While it may be tax-deferred, as I explained about tax credits, you will end up paying US tax as well as Cdn on these gains. If you keep it until you go back to Canada it will be taxed even more.

Take the money, and start pounding it to Roth and Roth401(k), and into your home. All are tax-free, not tax deferred, which is even better.

[DonMurphyCanada]

Totally off topic and maybe you know this already michaelthef but consider staying in the us for at least 10 years. That will make you eligible for social security and any cpp you are eligible for at retirement age. I was in your shoes many years ago and was unaware of the 10 year sweet spot and always thought I would live in the us. Now I am back in Canada and am eligible for both.

Don

[nelsona]

Don,

Once you work in US for 18 months, you are eligible for SS, if you also worked in Canada. It is Medicare that you lock in after 10 years.