US res cashing out that RRSP with a RRIF and saving $

[denisharlock]

Here's the scenario: dual citizen living in US, now 55 years old - wanting to get $ out.

$400k in RRSP, half will be taxable in US upon withdrawal

Plan 1) Convert to RRIF now: Withdraw twice the yrly minimum so that the CAN withholding tax is only 15%. In 10 years can withdraw the remainder over 5 yrs.

Plan 2) Keep RRSP till age 65. Then convert to RRIF and withdraw over 10 years knowing that a significant amount will be withheld at 25%.

Comments on which may be more effective, issues that I haven't thought about, and any possible problems with Plan 1?

[nelsona]

Unless your income will drop precipitously at some defined point, I would be tempted to start the 15% rate withdrawls now.

Just realize that even a little income reporatable in US, if your are in the higher tax braket will result in some extra US and state tax, so lowerinhg the Cdn tax is your best strategy.

[denisharlock]

I assume that your comment about 'unless your income will drop precititously' is addressing the amount of 'foreign tax credit' that can be used on my US return to offset the US tax that would be due.

What is your guestamit on the differecnce that could be used if in addition to the RRIF withdrawl there was say $0 US income vs $100k income?

Nearly all? half? lesser amount?

Thanx

[nelsona]

My reason for mentionning total income was that your taxrate for all incomewould drop if all you were getting as pension income. You would also become eligible for 217 election which could reduce your NR tax even less than 15%.

[denisharlock]

Can you explain further?

Thanx

[nelsona]

Non-residents with Cdn pension-type income can make a 217 election wherey they elect to be treated as if the lived in Canada, report all world income, with the goal of rducing the tax on their pension income to level below the flat NR tax.

This genarally works in the pension income is more that 90% of your total world income and that pesion income isless that $30K. Thus my comment abiut waiying for a period when other income would be low. Go to CRA site for more info.

Non-working spouses of TNs and H1s use this election to withdraw RRSPs at very low tax rates by taking 10-15K out and using their persaonl amount and other credits on the Cdn tax return.

Workers in their 30's and 40's typically are not going to wait for such a time, but those close to retirement could benefit by waiting.

In any event converting to RRIF is going to save you 10% tax, so that is a no brainer. But even at 15%, you are going to have tax left over evey year using 1116 unless your total income is over approx. 150K, particularly since your withdrawl will only be half taxable

[denisharlock]

Thanks again nelsona for your excellent advice.

Just recieved some additional info from RBC my RRSP/future RRIF account:

For many contries that Canada has a tax treaty with, including the US, any withdrawals from a RIF will be subject to a 15% non-resident withholding tax only if payments from the RIF during a calendar year are less than the [url]greater[/url] of:

i) twice the minimum withdrawal required for the year; or

ii) 10% of the fair market value of the RIF at the beginning of the year.

Does the second option sound right to you? If so, that means that those of us with a sizable RRIF can withdrawl it all in ~ 10 years at 15% withholding !

[nelsona]

I was not aware of the 10% caluse, but that sounds fine.
But rememeber 10% a year does not mean all in 10 years. In the first year your take 10% of say $100,000, then 10% of $90,000, etc. You will always have 90% left from what you started the year at.

[denisharlock]

Well put..........

The important point is, of course, that one can really accelerate taking a large amount out for the first few years. In any withdrawal scenario, the last few years will be well over the minimums.

This is still much preferable to the 25% withholding on an entire RRSP withdrawal !

[nelsona]

"This is still much preferable to the 25% withholding on an entire RRSP withdrawal !"

That's why I suggested it.