IRS has released the technical expanation for the new protocol.
In it it describes how Canada will treat Roths.
http://www.treas.gov/press/releases/rep ... nada08.pdf
In short, so long as you fund the Roth entirely as a non-resident of canada, you will not pay any cdn tax on any Roth income, neither yearly accrued, nor when withdrawn (as long as you meet the US rules for tax-free withdrawal of course).
However, the INSTANT you make any additional contributions (other than a rollover from another Roth or Roth 401(k)) as a Cdn resident, the pension properties of the Roth cease, frozen with the value on the day before you made the contribution, and all further income becomes taxable yearly with no deferral.
So, it is very important, for those contemplating move/return to canada to fully fund thier Roth before leaving, which may include transferring IRA/pensions/401(K) money -- which would be a taxable event in US but no early withdrawal penalty -- into a Roth.
Roth rules clarified for canada
Moderator: Mark T Serbinski CA CPA
Roth rules clarified for canada
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
Nelsona - As always, thank you for keeping us up to date!
I didn't see anything in the Technical Explanation to stop a USC (living in Canada) from opening a second Roth and making annual contributions in Canada. Or would funding the second Roth "contaminate" their original one?
In my proposed scenario, the USC has 2 Roths: 1) funded entirely while a non-resident of Canada, and 2) funded entirely while resident of Canada.
Based on my reading, it seems to me that Roth #1 remains tax free in both countries and Roth #2 remains tax-free in the USA and taxable (just like any other non-pension investments in Canada).
This proposed scenario doesn't save any tax in the near term (since all income is Roth #2 is fully taxed in Canada) but protects the USC in case future US federal tax rates (especially in retirement) are higher than Canadian rates and reduces likelihood of clawback in Social Security payments.
Does this make sense?
I didn't see anything in the Technical Explanation to stop a USC (living in Canada) from opening a second Roth and making annual contributions in Canada. Or would funding the second Roth "contaminate" their original one?
In my proposed scenario, the USC has 2 Roths: 1) funded entirely while a non-resident of Canada, and 2) funded entirely while resident of Canada.
Based on my reading, it seems to me that Roth #1 remains tax free in both countries and Roth #2 remains tax-free in the USA and taxable (just like any other non-pension investments in Canada).
This proposed scenario doesn't save any tax in the near term (since all income is Roth #2 is fully taxed in Canada) but protects the USC in case future US federal tax rates (especially in retirement) are higher than Canadian rates and reduces likelihood of clawback in Social Security payments.
Does this make sense?
Oh, but it WOULS save you HUGE tax immediately.
Example: Mr A has a $1,000,000 Roth in which he for some reason wishes to contribute $1000 as a Cdn resident. By the example provided, from that day forwars ALL income generated becomes taxable yearly, not just the income generated by the $1000 contributon. So a Roth with a 10% growth will generate $100,000 of immediately taxable income in Canada, with no more provision to shelter. I think you have neglected that terrible effect.
The 'bifurcation' that they talk about FREEZES the non-taxable amount at the $1,000,000 mark, with no more tax-free growth. Any withdrawl one makes is tax-free, since it is merely pension (tax-free), undeducted contribution (the $1000), and previously taxed growth (the yearly reported income -- all of it).
But indeed this segregation would appear to keep Roth #1 as a pension, and Roth #2 as a taxable investment account, which is CRUCIAL to saving tax.
Good thinking.
I don't have a handle on your clawback scenario, since the likelihood of US tax (for a Cdn reident USC) being higher than Canada is remote (especially in the incoem region we would be talking about).
We will see if CRA is smart enough to anticipate this
Example: Mr A has a $1,000,000 Roth in which he for some reason wishes to contribute $1000 as a Cdn resident. By the example provided, from that day forwars ALL income generated becomes taxable yearly, not just the income generated by the $1000 contributon. So a Roth with a 10% growth will generate $100,000 of immediately taxable income in Canada, with no more provision to shelter. I think you have neglected that terrible effect.
The 'bifurcation' that they talk about FREEZES the non-taxable amount at the $1,000,000 mark, with no more tax-free growth. Any withdrawl one makes is tax-free, since it is merely pension (tax-free), undeducted contribution (the $1000), and previously taxed growth (the yearly reported income -- all of it).
But indeed this segregation would appear to keep Roth #1 as a pension, and Roth #2 as a taxable investment account, which is CRUCIAL to saving tax.
Good thinking.
I don't have a handle on your clawback scenario, since the likelihood of US tax (for a Cdn reident USC) being higher than Canada is remote (especially in the incoem region we would be talking about).
We will see if CRA is smart enough to anticipate this
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 guess the question I am asking myself (as a USC in Canada) is this: Is there any downside to opening a second Roth and funding it annually? I would just pay my Canadian taxes on the Roth earnings & gains. There is a chance that it never amounts to anything but I can see two scenarios where it makes sense: 1) I "emigrate" from Canada to either the USA or another country, and 2) At some point my US taxes become higher than Canadian taxes (very possible given US budget problems).
My concern is that CRA interprets a second "non sheltered" Roth to contaminate the sheltered Roth. Not sure on what grounds they could do this since the assets are seperated.
My concern is that CRA interprets a second "non sheltered" Roth to contaminate the sheltered Roth. Not sure on what grounds they could do this since the assets are seperated.
Until we see the actual regs, I would not open a second Roth (assuming of course that you haven't contributed this far to a Roth as a Cdn resident, in whch case your Roth is already contaminated).
There is a current principle in the spousal RRSP realm, which holds, indeed, that ANY contribution to ANY spousal RRSP keeps the attribution rules on ALL the spousal RRSPs active for 3 year-ends, so its not beyong the pale that they would enact similar regs for Roths.
There is a current principle in the spousal RRSP realm, which holds, indeed, that ANY contribution to ANY spousal RRSP keeps the attribution rules on ALL the spousal RRSPs active for 3 year-ends, so its not beyong the pale that they would enact similar regs for Roths.
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
Thanks for the info Nelsona. I think I may have a contaminated Roth with this news -- I'm a Canadian resident F-1 student in the US and I just opened a Roth a few months ago. If I plan to stay in the US and eventually become a US resident in a few years, am I better off closing the Roth now, waiting, and then re-opening one as a US resident? Do I actually have to close the Roth account or just empty it to "cleanse" it?
Given my current situation, is moving that money to a traditional IRA in the meantime a viable alternative?
Given my current situation, is moving that money to a traditional IRA in the meantime a viable alternative?
[quote="nelsona"]You said you reside in US. That is sufficient. By resident I mean treaty resident, not necessarily green card holder.[/quote]
I'm a little confused. I'm currently living in the US but I'm a non-resident alien for tax/visa purposes. You're saying that simply because I reside in the US, I'm considered a US resident for treaty purposes?
That seems to be what paragraph 1 of Article IV suggests, but please confirm. Thanks!
I'm a little confused. I'm currently living in the US but I'm a non-resident alien for tax/visa purposes. You're saying that simply because I reside in the US, I'm considered a US resident for treaty purposes?
That seems to be what paragraph 1 of Article IV suggests, but please confirm. Thanks!
As a 'F-1' you are in a gray area, because IRS does not consider you a tax resident on F1. But if you have no residential ties in Canada (you don't say), then there may be room for consideration as treaty resident.
But if you maintain a home in canada while in US, then indeed, because you are F1, you cannot be a treaty resident of US. If you were in any other status, you could and would be considered US tax resident.
Now, back to your question about a contaminated Roth. You can't close the Roth nor roll it to IRA (unless it was opened in 2008). If you did just open it in 2008 (for 2008 contribution, not 2007), then yes, I would be changing it to an IRA.
But if you maintain a home in canada while in US, then indeed, because you are F1, you cannot be a treaty resident of US. If you were in any other status, you could and would be considered US tax resident.
Now, back to your question about a contaminated Roth. You can't close the Roth nor roll it to IRA (unless it was opened in 2008). If you did just open it in 2008 (for 2008 contribution, not 2007), then yes, I would be changing it to an IRA.
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
Remember, that even before this treaty protocol, that has not yet taken effect, ALL Roths were considered contaminated, regardless of when it was funded.
You jumped the gun in two ways (a) not realizing that Roths are not for Cdn residents ,and (b) not noting the warning in the protocol that one should not fund while non-resident of US.
You jumped the gun in two ways (a) not realizing that Roths are not for Cdn residents ,and (b) not noting the warning in the protocol that one should not fund while non-resident of US.
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
[quote="nelsona"]Remember, that even before this treaty protocol, that has not yet taken effect, ALL Roths were considered contaminated, regardless of when it was funded.
You jumped the gun in two ways (a) not realizing that Roths are not for Cdn residents ,and (b) not noting the warning in the protocol that one should not fund while non-resident of US.[/quote]
Thanks for the reply. I don't have any residential ties to Canada so I hope I can fall into the gray area... but unfortunately the Roth was opened for 2007 contribution in early April, so changing it to an IRA isn't an option.
Would you suggest just leaving the Roth alone and opening an regular IRA for 2008 (and future) contributions? It does sound like I can pull out the Roth contributions penalty/tax free at any time and leave what little earnings I have in the Roth. The market hasn't done much in the last 4 months so luckily at this point I wouldn't be losing anything.
You jumped the gun in two ways (a) not realizing that Roths are not for Cdn residents ,and (b) not noting the warning in the protocol that one should not fund while non-resident of US.[/quote]
Thanks for the reply. I don't have any residential ties to Canada so I hope I can fall into the gray area... but unfortunately the Roth was opened for 2007 contribution in early April, so changing it to an IRA isn't an option.
Would you suggest just leaving the Roth alone and opening an regular IRA for 2008 (and future) contributions? It does sound like I can pull out the Roth contributions penalty/tax free at any time and leave what little earnings I have in the Roth. The market hasn't done much in the last 4 months so luckily at this point I wouldn't be losing anything.
How are you filing in Canada, since you have no ties there? The treaty would come down in favour of US residence, as this is your centre of vital interests.
But then yoy should not be filing as a Cdn resident, and should have obeyed all the requirements of a departing resident.
But, as you realize, your Roth is not much of a liability at this point, neither from a US nor Cdn point of view, because of its size.
Does your employment not offer some 401(k)/403(b) plan. This would give rise to a much quicker rate of contribution.
But then yoy should not be filing as a Cdn resident, and should have obeyed all the requirements of a departing resident.
But, as you realize, your Roth is not much of a liability at this point, neither from a US nor Cdn point of view, because of its size.
Does your employment not offer some 401(k)/403(b) plan. This would give rise to a much quicker rate of contribution.
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
As F-1 student I'm exempt from the substantial presence test, so I have to file resident in Canada, non-resident in USA. I haven't officially departed Canada yet but will do so one I transition to a H1B/TN visa. Unfortunately I don't have a 401k/403b plan available.
If I keep the Roth, I see two possible scenarios:
Pay tax on any Roth gains to the CRA over the next few years while I still file CDN taxes. Officially depart Canada, become US resident, stop filing CDN taxes. Then either:
1) Retire in 30 years in the US and withdraw Roth $ tax free OR
2) Stop contributing to the Roth and then move back to Canada. Gamble that the CRA won't know that I jumped the gun way back now and hope that I can withdraw the Roth $ tax free.
If I keep the Roth, I see two possible scenarios:
Pay tax on any Roth gains to the CRA over the next few years while I still file CDN taxes. Officially depart Canada, become US resident, stop filing CDN taxes. Then either:
1) Retire in 30 years in the US and withdraw Roth $ tax free OR
2) Stop contributing to the Roth and then move back to Canada. Gamble that the CRA won't know that I jumped the gun way back now and hope that I can withdraw the Roth $ tax free.