A Canadian couple has been referred to me by their Canadian broker, a friend of mine. The couple has about $150,000 in his IRA from when he worked in the states. They are Canadian citizens and residents. He is in his 70s.
They don't need the income from the IRA. It has been sitting in a money market for years because they didn't know what to do with it. Their main objective is to get this investment out of the U.S., make their investment easy to administer and make their estates easy on their kids when that time comes.
We are considering several scenarios for them and I seek opinions on one specific scenario.
Step 1: Use his IRA to purchase a ten year period certain fixed annuity. They convert their U.S. asset into income.
Step 2: Pay withholding in the U.S.
Step 3: Bring the money to Canada.
Step 4: Take out a leverage loan to purchase Canadian mutual funds which they will eventually leave to their kids.
Step 5: Use the income from the IRA/annuity to pay off the leverage loan. Will the tax deductibility of the leverage loan help offset the tax they pay on their IRA income?
Basically, I'm looking for any holes in this plan. I understand the currency risk, that if the U.S. dollar continues to decline, the payments from the IRA/annuity will not be sufficient to cover the payments due on the leverage loan.
Comments are appreciated!
Thanks,
Collapse IRA and Use Proceeds to Purchase Canadian Portfolio
Moderator: Mark T Serbinski CA CPA
Step 1. Is this (a) converting the IRA into a US annuity, or is this (B)cashing out the IRA completely, bringing it to canada and then buying an annuity?
(A) dose nothing to satisfy the stated goal of bringing the investment to canada does it.
I would remind you that at 70, there begins required withdrawals of IRA.
Step 5. The interest will not lower the US tax. Filing a 1040NR might. Even then the interest is not an eligible dedution on 1040NR. If they filed a 1040, they would need to report world income on that 1040. I would not suggest 'simplifying' their life in this manner.
I will send you a private comment about what I really think.
(A) dose nothing to satisfy the stated goal of bringing the investment to canada does it.
I would remind you that at 70, there begins required withdrawals of IRA.
Step 5. The interest will not lower the US tax. Filing a 1040NR might. Even then the interest is not an eligible dedution on 1040NR. If they filed a 1040, they would need to report world income on that 1040. I would not suggest 'simplifying' their life in this manner.
I will send you a private comment about what I really think.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
I always suggest that anyone who gets 'risky' advice from a broker should tell that broker "Would you mind if I implemented this scheme, but use another broker?" This usually puts a leash on a brokers 'creativity'.
In reality, you are saying that a couple in their 70's who have been reluctant to take use their IRA to invest in anything at all, are now going to use this money to buy (a) a US annuity, and (B) a whole lot of Cdn mutual funds
This accomplishes none of the stated goals which were: " to get this investment out of the U.S., make their investment easy to administer and make their estates easy on their kids."
It will generate a good income stream for the broker however.
They say you can tell a lot about a person by their friends.
In reality, you are saying that a couple in their 70's who have been reluctant to take use their IRA to invest in anything at all, are now going to use this money to buy (a) a US annuity, and (B) a whole lot of Cdn mutual funds
This accomplishes none of the stated goals which were: " to get this investment out of the U.S., make their investment easy to administer and make their estates easy on their kids."
It will generate a good income stream for the broker however.
They say you can tell a lot about a person by their friends.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Nelson,
Thanks for your replies.
To answer a couple of your questions, the clients would roll the ira directly into a 10 year period certain annuity. Not a great investment, but extremely easy for them to administer and from a rate of return perspective no worse than the money market fund that they've been in. This is the U.S. side.
On the Canadian side they would take out the leverage loan to purchase the basket of securities. As I understand it, interest on leverage loans is tax-deductible in Canada. I'm far less familiar with Canadian investment practices than U.S. and we don't have non-callable leverage loans as they do in Canada.
In reality, I don't think the client will be interested in this as I believe they would rather get the money out of the U.S. and spend it on their grandchildren than bother with a leverage loan and adding to their already sizable Canadian holdings. I can't say that I disagree with them.
Forgeting this particular client, will this scenario work? Specifically, I have three questions:
Is it better for the wife to inherit a stream of income than assets in an IRA;
Is my understanding of tax deductibility of interest on leverage loans correct, and;
would the kids (all Canadian residents) be better off inheriting a portfolio on non-registered Canadian mutual funds than an IRA from their parents?
Again, thank you.
Thanks for your replies.
To answer a couple of your questions, the clients would roll the ira directly into a 10 year period certain annuity. Not a great investment, but extremely easy for them to administer and from a rate of return perspective no worse than the money market fund that they've been in. This is the U.S. side.
On the Canadian side they would take out the leverage loan to purchase the basket of securities. As I understand it, interest on leverage loans is tax-deductible in Canada. I'm far less familiar with Canadian investment practices than U.S. and we don't have non-callable leverage loans as they do in Canada.
In reality, I don't think the client will be interested in this as I believe they would rather get the money out of the U.S. and spend it on their grandchildren than bother with a leverage loan and adding to their already sizable Canadian holdings. I can't say that I disagree with them.
Forgeting this particular client, will this scenario work? Specifically, I have three questions:
Is it better for the wife to inherit a stream of income than assets in an IRA;
Is my understanding of tax deductibility of interest on leverage loans correct, and;
would the kids (all Canadian residents) be better off inheriting a portfolio on non-registered Canadian mutual funds than an IRA from their parents?
Again, thank you.
Arteeh
There are a couple of issues that are particular to senior Cdn taxpayers that you may not be aware of. One is clawback, the second is deemed diposition at death.
Taking more than the required distribution from an IRA may make one subject to clawback, when taken in conjunction with their Cdn income. Locking one into a fixed ammount of income may subject them unnecesarily to clawback every year, when it may be avoidable all together, or may be advisable to take a one-year hit and collapse altogether. (in fact, this likley would be my advice in this situation, even more so before age 65, when clawback becomes reality.)
Other than certain items inherited by the surviving spouse all assets are deemed sold at death, inducing a large tax bill. Not estate tax, but close.
Given these factors, and given that the US holdings are small, a pro more familiar with Cdn taxes would be preferable as lead. The US tax and estate issues in this case are rather simple in comparison.
Taking more than the required distribution from an IRA may make one subject to clawback, when taken in conjunction with their Cdn income. Locking one into a fixed ammount of income may subject them unnecesarily to clawback every year, when it may be avoidable all together, or may be advisable to take a one-year hit and collapse altogether. (in fact, this likley would be my advice in this situation, even more so before age 65, when clawback becomes reality.)
Other than certain items inherited by the surviving spouse all assets are deemed sold at death, inducing a large tax bill. Not estate tax, but close.
Given these factors, and given that the US holdings are small, a pro more familiar with Cdn taxes would be preferable as lead. The US tax and estate issues in this case are rather simple in comparison.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
From a purely financial perspective, I would like to see them proceed as follows:
1. Transfer husband's IRA into conservative mutual fund that is not very volatile, probably the American Balanced Fund.
2. Withdraw only RMDs.
3. Leave IRA to wife at his death.
4. She continues with RMDs.
5. Leave the IRA to the grandchildren upon her death and advise them to maintain the IRA as a "stretch or beneficiary" IRA.
I think this would minimize their tax burden and allow them to have a real financial impact on the lives of their grandchildren. I'm not certain that they will want to do this as it will mean that the grandchildren will eventually need to obtain U.S. tax id numbers and file non-resident returns.
However, it is a nice way to make the most of an IRA.
As an aside, this client has everything clawed back that is possible have clawed back.
I appreciate having you as a sounding board for this Nelson.
Regards,
1. Transfer husband's IRA into conservative mutual fund that is not very volatile, probably the American Balanced Fund.
2. Withdraw only RMDs.
3. Leave IRA to wife at his death.
4. She continues with RMDs.
5. Leave the IRA to the grandchildren upon her death and advise them to maintain the IRA as a "stretch or beneficiary" IRA.
I think this would minimize their tax burden and allow them to have a real financial impact on the lives of their grandchildren. I'm not certain that they will want to do this as it will mean that the grandchildren will eventually need to obtain U.S. tax id numbers and file non-resident returns.
However, it is a nice way to make the most of an IRA.
As an aside, this client has everything clawed back that is possible have clawed back.
I appreciate having you as a sounding board for this Nelson.
Regards,
Arteeh
Since they are already subject to clawback, I would be advbising them to collapse the IRA in one shot. As non-residents there is no tax saving in stretching it out, and the IRA will be subject to estate tax twice in your scenario. Non USC's do not get full benefit of estate tax exclusions.
Some oif the IRA collapse would be eligible for inclusion in their RRSP as a transfer (essentially upto the ammount of any Cdn income for the yera), so the tax hit would be further minimized.
Your solution is not very CDn-friendly I'm afraid. There is no reason to keep this IRA going
Some oif the IRA collapse would be eligible for inclusion in their RRSP as a transfer (essentially upto the ammount of any Cdn income for the yera), so the tax hit would be further minimized.
Your solution is not very CDn-friendly I'm afraid. There is no reason to keep this IRA going
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
Let's see if I understand things correctly.
From this U.S. side
1. He maintains his ability to leave his IRA to his wife, kids, grandchildren etc. The fact that he is not a U.S. citizen or resident does not effect his options.
2. His wife can roll his IRA into her IRA when he passes on.
3. Their children and grandchildren can stretch the IRA following IRS regulations.
4. I don't know how U.S. estate tax treats non-residents and would appreciate advice in this area.
From The Canadian Side
1. None of the above matters as CRA will apply deemed disposition rules at his death.
How does this fit with other posts that you've made in which you've told people that they are not being taxed by CRA because they inherited an IRA, but becasue they chose to take a lump sum distribution from the IRA?
As always, thank you.
From this U.S. side
1. He maintains his ability to leave his IRA to his wife, kids, grandchildren etc. The fact that he is not a U.S. citizen or resident does not effect his options.
2. His wife can roll his IRA into her IRA when he passes on.
3. Their children and grandchildren can stretch the IRA following IRS regulations.
4. I don't know how U.S. estate tax treats non-residents and would appreciate advice in this area.
From The Canadian Side
1. None of the above matters as CRA will apply deemed disposition rules at his death.
How does this fit with other posts that you've made in which you've told people that they are not being taxed by CRA because they inherited an IRA, but becasue they chose to take a lump sum distribution from the IRA?
As always, thank you.
Arteeh
I think you misunderstood my previous post.
I said: Yes (deemed disposition in canada would occur), UNLESS he bequeaths it to someone such that it does not trigger US income in his name.
If you say that bequething it to the spouse and then to kids is not an INCOME taxable event in US (I agree), then there will be no income tax in canada on it either. Only if someone, anyone, takes the money as income will canada be able to tax it as income.
Each bequest will trigger ESTATE/GIFT tax issues, though, except -- unless we are talking large IRA -- the one to the spouse, , in which case each step will trigger estate tax. NR get very little estate tax exemption.
So, your final attribution "that they are not being taxed by CRA because they inherited an IRA, but becasue they chose to take a lump sum distribution from the IRA?" is exactly the case, as I aoutlined above.
I said: Yes (deemed disposition in canada would occur), UNLESS he bequeaths it to someone such that it does not trigger US income in his name.
If you say that bequething it to the spouse and then to kids is not an INCOME taxable event in US (I agree), then there will be no income tax in canada on it either. Only if someone, anyone, takes the money as income will canada be able to tax it as income.
Each bequest will trigger ESTATE/GIFT tax issues, though, except -- unless we are talking large IRA -- the one to the spouse, , in which case each step will trigger estate tax. NR get very little estate tax exemption.
So, your final attribution "that they are not being taxed by CRA because they inherited an IRA, but becasue they chose to take a lump sum distribution from the IRA?" is exactly the case, as I aoutlined above.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best
So at the end of the day, this man needs estate planning advice to determine whether or not his IRA will be hit with estate tax when it is transferred to the next generation.
If it will be hit with U.S. estate tax, he should collapse the IRA now and take his lumps (assuming he is already in Ontario's highest tax bracket).
If it won't be hit be hit with U.S. estate tax, he can consider leaving the IRA to the next generation and allowing them to stretch it as long as possible under U.S. regulations.
Of course, there is the issue of "is it really worth the headache"?
Am I finally getting a handle on the sitiuation?
Thanks,
Arteeh
If it will be hit with U.S. estate tax, he should collapse the IRA now and take his lumps (assuming he is already in Ontario's highest tax bracket).
If it won't be hit be hit with U.S. estate tax, he can consider leaving the IRA to the next generation and allowing them to stretch it as long as possible under U.S. regulations.
Of course, there is the issue of "is it really worth the headache"?
Am I finally getting a handle on the sitiuation?
Thanks,
Arteeh
Arteeh
It is definitely not wort h the headache. He already has RDA. An annuity won't save any taxes. Take it out in one year or 10.
He (I mean a Cdn tax planner) should be looking at taking it all and rolling it inro his existing RRSP, likely at little tax.
He (I mean a Cdn tax planner) should be looking at taking it all and rolling it inro his existing RRSP, likely at little tax.
After 20 years, I am severely cutting back on responses. Do not ask specifically for my help. There are a few others on this board that can answer most questions. All the best