RRSP or IRA for U.S. citizen temporarily working in Canada

[jjia]

I have just completed graduate school and am starting a 2-year long post-doc fellowship at UBC.

I opened up a Roth IRA as well as a brokerage account before leaving the U.S. and currently have a combined balance of around $3000 US in these accounts.

According to Wikipedia (on Roth IRA) and other online sources, any contributions to my Roth IRA while residing in Canada will cause the account to "bifurcate" into a pension account and a non-pension account; so any income accrued in the non-pension part of the Roth IRA is subject to Canadian taxation.

This leads to my first question:

-- When I return to U.S. (say in two years), will the Roth IRA return to normal? Or will it still be a bizarre bifurcated account where part of it is nothing more than a brokerage account for tax purposes? --

Considering that the tax in Canada is quite high in comparison to those in the U.S., I am looking into opening a RRSP to reduce my taxable earnings.

My salary will be $47000 CAD pre-tax, and I do plan to contribute to my Roth IRA if it makes sense to do so.

This leads to my questions on RRSP, which I am not familiar with at all:

-- 1. Will it be in my interest to open a RRSP and contribute about 20% of my income into such a retirement plan? --

-- 2. Can I still contribute to the RRSP when I return to the U.S.? Will it still be tax exempt (in the U.S.)? --

-- 3. A more opened-ended one: I suppose when I withdraw from the RRSP, I would need to pay Canadian tax. What about U.S. tax? Will I be double-taxed? --

Thanks in advance

[nelsona]

Simply DO NOT make any contributions or transfers into your Roth while living in canada. This will avoid any issue.

Of course, the taxable portion (in the eyes of canada) is unimportant once you cease living in canada, since you will no longer be taxable there.

If you do decide to contribute to an RRSP, unless it is thru your employer, it will not be deductible in US, which likely won't matter since you will exempt your wages in US by form 2555.

Once you leave US, the RRSP is sheltered, but you will have to file a form 8891 every year until the RRSP is collapsed, and you will owe canada a flat 25% on any withdrawal, and owe IRS tax on anything more than you contributed. Not ideal for such a short term stay.

So, forget Roth while in canada, determine your marginal taxrate in your BC bracket, and if it is more than 25%, contribute to RRSP within that bracket, and when you leave Canada, collapse the RRSP and pay 25% to canada. Use the 25% Cdn tax toward your US tax on any growth.

So, as you can see, there is not much opportunity to save taxes, and you will unnecesarily complicate your tax future with little tax savoings in the next 2 years.

[nelsona]

And just to be precise on the Roth issue. If you came to canada with $3000 in your Roth nad then contributed, say on the day you arrived, only the $3000 and any future contributions would be non-taxable in Canada (ie just like a non-sheltered account). All growth would be taxable for as long as you were taxable in canada, including if you subsequently left and came back.

its not really bifurcation, since the growth attributable to your $3000 that you came to Cnada with would still be taxable in canada. So none of the account would remain sheltered.

there is some wiggle room for some interpretation, but I wouldn't be worrying about a $3000 Roth. Just don't contribute while in Canada.

[jjia]

Thank you very much for such a timely reply. I have been wrecking my brains over all these messy taxation policies. Glad to have some reliable information. Keep up the good work!

[jjia]

One more thing just crossed my mind. Would it be worthwhile to open a traditional IRA, which is considered a pension plan under the U.S.-Canada tax treaty?

Perhaps I can then roll over the traditional IRA into my Roth IRA.

Thanks.

[nelsona]

I though of that. However, the IRA would be deductible only on your US return, which will be of no good to you. You aren't going to pay any tax in US while working in Canada.

While an IRA is considered a pension by canada, the contributions are never deductible on your Cdn return. Only an employer-sponsored plan (401k, etc) contribution is.

And then the rollover to Roth later would be taxable on your 1040.

Btw, you would not be allowed any RRSP contribtiuon in your first year in Canada, since limit is determined from previous years' wages reported on Cdn return, which for you are NIL.

I think you are just going to have to forego any sheltering while in canada.

[jjia]

Point taken. Thanks for the honest and clear explanation, it's the best out there.

[Terri717]

Hello, I'm in a very similar situation. I am a US Citizen and moved to Canada in May 2008. I've been working at the same company, making 60,000 a year. I have about 3,000 in a traditional IRA back in the states.

Over the past 2 years, I've been "worried" about my retirement future, because I'm a pre-planner, and I know the earlier you invest, the better! I'm now 30...so I'm getting a little anxious.

I haven't done anything in Canada, besides "save" money, it's currently in a Tax Free Savings Account (which I opened a few months ago)...I assume that the US doesn't consider the TFSA as tax free, but it should fall within my earned income exclusion.

Is there anything else I can do in the meanwhile? I too only plan to live in Canada for another 2 years or so. I was thinking of opening a Roth IRA (which sounds like a bad idea now!) - or even contributing to my traditional (still a bad idea, I'm guessing?) I don't know if RRSP's are worth it...with moving away in 2 years. I guess I could do that and get the 25% penalty? Which then...would it even be worth it? Oh and by the way, am I supposed to report my traditional IRA to Canada or is that only the Roth? (I've been paying H&R block to do my taxes, as I've been too confused by the whole process).

Sorry for so many questions, but I've been searching for months and can't seem to find the best answers!

[nelsona]

Interst and investment income is not included in your exclusion, so it will be taxable in US.

Therer is no penalty for RRSP withdrawal.

You need to do more reading.

[Terri717]

Thanks for the response. Do you have any recommendations for reading material? So far what I've found online has been inconsistent. Thanks for any input you may have!

Regards, Terri

[nelsona]

This forum is pretty consistent and acurate.

[nelsona]

You can put money in an RRSP to save Cdn tax. However it will be a pain for the rest of your life until you cash it.

The tFSA wasa mistake too, since it not only is taxable in US, it is a trust, which requires filing a 3520 starting now -- not pleasant. Close that when you leave -- you got sucked into the hype for nothing.

[Terri717]

K, thanks, I'll navigate through more of the forum postings.

K, thanks for the info on the TFSA, I'll definitely close it when I leave. I opened it because I'm trying to save money for a down payment on a house, which we'd buy upon arrival in the US.

[nelsona]

So a TFSA was of no benefit to you.

[Terri717]

What would be a better alternative?