RRSP Tax implications for US residents
Moderator: Mark T Serbinski CA CPA
RRSP Tax implications for US residents
I have a RRSP that is currently around 120,000 cdn and I have basically forgotten about it for the last 15 years since I have lived in the US. Now that I am a US citizen and intend to stay here and the cdn-us exchange rate is so high I was wondering about bring the RRSP money down to the US. I have read a little on the subject and it appears that if a take the money over time in a series of periodic pension payments my cdn tax exposure could be 15% instead of 25% if I take it as a lump sum - is this correct. If it is what is the maximum size of the periodic pension payment I can take in order to qualify for the 15% treatment? Is it the greater of a)10% of the total fair market value or b)the 90 minus your age calculation thing (I am 45). If it is 10% of the FMV then I would assume the most I can bring down here is 12,000 cdn to qualify for the 15% option. Can you confirm my research or any any more sources for me to read or look up?
To qualify for 15%, you need to convert it to a RRIF, and then you are allowed twice the annual minimum withdrawl at the 15% rate, after the first year. so it would take several years to collapse it.
In US, where you have of course been filing your annual RRSP statements in order to avoid US tax and penalties (right?) you will owe tax on the growth since uou left (in US dollars), with the Cdn tax aloowed as a credit against the US tax.
In US, where you have of course been filing your annual RRSP statements in order to avoid US tax and penalties (right?) you will owe tax on the growth since uou left (in US dollars), with the Cdn tax aloowed as a credit against the US 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
I have filled Form 8891 since 2006 where I declared a value of 125,000 on it - since then the value has dropped slightly. What value do I use to determine the taxable part - is it the value on the date I first moved to the US (May 1996) - the value on the day I became a permanent resident (August 1997) - or the value when I became a citizen (May 2001) or the $125,000 value I declared in 2006 on form 8891. To further complicate thing I live in California which does not appear to give any foreign tax credit.
The value on the day you became taxable in US.
California not only doesn't give tax credit, they do not allow you to defer tax on yearly income in RRSP. The good news is that that means that an RRSP withdrawal does not incur any cali tax.
California not only doesn't give tax credit, they do not allow you to defer tax on yearly income in RRSP. The good news is that that means that an RRSP withdrawal does not incur any cali 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
.. and the value is the value in USD back in 1996. You may have filed full year back then, which would make valuation date Jan 01.
And remember it's BOOK value at that time, not market value.
And remember it's BOOK value at that time, not market value.
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
For persons who were not US citizens at the time of arrival in US, contributions plus growth is permitted.
However BOOK value is the cost of the assets you had when you arrived, noy market value
Example, you contributed $60 US to your RRSP. When you left canada you had 10 units of ABC bought at $10/each (US) in 1995. The value when you left was $12/each (US).
The book value is $10 (ie. $100) That is what is not taxable.
Foe a US citizen, $60 is untaxable.
Its never the market value $120.
However BOOK value is the cost of the assets you had when you arrived, noy market value
Example, you contributed $60 US to your RRSP. When you left canada you had 10 units of ABC bought at $10/each (US) in 1995. The value when you left was $12/each (US).
The book value is $10 (ie. $100) That is what is not taxable.
Foe a US citizen, $60 is untaxable.
Its never the market value $120.
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 have two questions about this.
1) If a person moves to California, does this mean if they had a book value of $100, then the first year they arrive they would have to pay tax on the $20? (120-100). What I'm imagining here is someone that doesn't step up the book value ending up having a really bad first tax year. Let's say they had a book value of $50,000 that had a market value of $100,000. Then they would have to pay (california) tax on the $50,000 difference in their first year of filing in the US?
2) What if the market value is less than the book value? (I suppose if they moved to any state other than California it might not matter because they are probably deferring tax on it.) But in California what would it mean?
1) If a person moves to California, does this mean if they had a book value of $100, then the first year they arrive they would have to pay tax on the $20? (120-100). What I'm imagining here is someone that doesn't step up the book value ending up having a really bad first tax year. Let's say they had a book value of $50,000 that had a market value of $100,000. Then they would have to pay (california) tax on the $50,000 difference in their first year of filing in the US?
2) What if the market value is less than the book value? (I suppose if they moved to any state other than California it might not matter because they are probably deferring tax on it.) But in California what would it mean?
The determination of what is taxable is not differrent between the IRS and Cali. The only difference is that you must pay tax on any yearly income in Cali, while IRA allows you to defer taxation until you take the money out of the RRSP shelter.
Let's construct an example based on yours: you have 2 investments. ABC was bought at $60 and is worth $100 the day you cross into US, moving to California. XYZ was bought at $200 and is worth $150 when you cross. So the book value for you RRSP is $60 + $200 = $260.
Some time after you move, you decise to trade -- within your RRSP -- ABC for GoodCo. ABC was worth $120 when you traded. Your cost for Goodco is $120.
For cali, you need to report a capital gain of $60: 120 -60. For IRS, you elected to defer, so you report nothing.
You later trade XYZ for $160 and buy AmerCo. For cali, you report a loss of $40: 200- 160. For IRS you continue to report nothing.
So, now lets take a look at the account: For cali purposes you have 2 stocks: GoodCo cost $120 and AmerCo cost $160. For IRS, you stioll have an RRSP that has a book value when you moved of $260; this does not chnage: nothing else matters to IRS in terms of what you've done in the account since you moved.
Now, fed up with al the extra paperwork, you decide to collapse your RRSP, selling GoodCo (for $210) and AmerCo (for $190).
For cali, you report gains of $90 for GoodCo, and $30 for AmerCo.
For IRS, you report a gross income from your RRS of $400, and a taxable income of $140 (400 - 260). On your IRS 1040, you can use the $100 tax you paid in Canada, as a credit towrds your fedearl tax on the $140 taxable.
So to recap, you reported $140 net profit in cali, and $140 profit on IRS. The only difference was that it was reported at different times, under a different income category.
Now, what do we learn. had you sold ABC before leaving canada, and bought something else, it would have had a book value of $100. The fact that it had a FMV of $100 when you moved doesn't help you, you need to crystallize the gain before moving to avoid both IRS and cali tax. Conversly for XYZ, by hiolding the losing position, you kept your cost and book value high, reducing future tax. Again FMV meant nothing.
To specifically answer yoyr questions:
1. If they arrive in cali with a book value of $100 and sell for $120, they owe tax on $20. If they SELL for $100,000 an investment that had a book value of $50,000, theuy would owe tax on the $50K profit. It is only triggered by the sale.
2. Fopr cali, You would get a capital loss if you sold below book value. For IRS if you eventually collpsed your RRSP for less than it was booked when you moved, you would owe no tax, and might be able to claim some terminal loss as a miscellaeous expense. Not as good as the capital loss you would get from cali.
another thing to watch for in cali is annual distributions/dividends: these are taxable year-by-year. So, your overall RRSP value may be tanking, but you are hit witha a taxable distribution. These distributions are meaningless in the IRS world (if you defer) since these don't change your RRSP's entry book value.
Let's construct an example based on yours: you have 2 investments. ABC was bought at $60 and is worth $100 the day you cross into US, moving to California. XYZ was bought at $200 and is worth $150 when you cross. So the book value for you RRSP is $60 + $200 = $260.
Some time after you move, you decise to trade -- within your RRSP -- ABC for GoodCo. ABC was worth $120 when you traded. Your cost for Goodco is $120.
For cali, you need to report a capital gain of $60: 120 -60. For IRS, you elected to defer, so you report nothing.
You later trade XYZ for $160 and buy AmerCo. For cali, you report a loss of $40: 200- 160. For IRS you continue to report nothing.
So, now lets take a look at the account: For cali purposes you have 2 stocks: GoodCo cost $120 and AmerCo cost $160. For IRS, you stioll have an RRSP that has a book value when you moved of $260; this does not chnage: nothing else matters to IRS in terms of what you've done in the account since you moved.
Now, fed up with al the extra paperwork, you decide to collapse your RRSP, selling GoodCo (for $210) and AmerCo (for $190).
For cali, you report gains of $90 for GoodCo, and $30 for AmerCo.
For IRS, you report a gross income from your RRS of $400, and a taxable income of $140 (400 - 260). On your IRS 1040, you can use the $100 tax you paid in Canada, as a credit towrds your fedearl tax on the $140 taxable.
So to recap, you reported $140 net profit in cali, and $140 profit on IRS. The only difference was that it was reported at different times, under a different income category.
Now, what do we learn. had you sold ABC before leaving canada, and bought something else, it would have had a book value of $100. The fact that it had a FMV of $100 when you moved doesn't help you, you need to crystallize the gain before moving to avoid both IRS and cali tax. Conversly for XYZ, by hiolding the losing position, you kept your cost and book value high, reducing future tax. Again FMV meant nothing.
To specifically answer yoyr questions:
1. If they arrive in cali with a book value of $100 and sell for $120, they owe tax on $20. If they SELL for $100,000 an investment that had a book value of $50,000, theuy would owe tax on the $50K profit. It is only triggered by the sale.
2. Fopr cali, You would get a capital loss if you sold below book value. For IRS if you eventually collpsed your RRSP for less than it was booked when you moved, you would owe no tax, and might be able to claim some terminal loss as a miscellaeous expense. Not as good as the capital loss you would get from cali.
another thing to watch for in cali is annual distributions/dividends: these are taxable year-by-year. So, your overall RRSP value may be tanking, but you are hit witha a taxable distribution. These distributions are meaningless in the IRS world (if you defer) since these don't change your RRSP's entry book value.
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
You can claim the entire tax on your federal return, either as a deduction on schedule A, or as a tax credit on form 1116, generlalimitation income.
Of course, if you use the tax credit, form 1116 will severely reduce the amount of the tax you can actually use against the US tax, since very little income will be taxable in US, and the tax is calcualted on a prorated basis. But you can carry forwrd the unused tax for future years, should you have foreign general limiation income in future.
Typically, one tries both methods to see which yields loest US tax bill.
Of course, if you use the tax credit, form 1116 will severely reduce the amount of the tax you can actually use against the US tax, since very little income will be taxable in US, and the tax is calcualted on a prorated basis. But you can carry forwrd the unused tax for future years, should you have foreign general limiation income in future.
Typically, one tries both methods to see which yields loest US tax bill.
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
help!
Thanks for this forum, it has been a great help.
My situtions is similar to what is discussed here.
I am a canadian living in the US. Before I moved I crystelized my RRSP investment and made it all cash ($150,000) within the rrsp (dec 2007). In 2008 i had some interest in the rrsp (about $3000). I had about $2000 in interest in 2009. Also in 2009 I collapesed the rrsp and paid the 25% withholding tax ($38,750) getting the remaining $116,250.
Now,
1. In 16a i will put $155,000, in 16b i put 5000. Correct?
2. I report $2000 to cali for 2009 (as I reported 3000 last year for 2008)
Q. Should I use 1116 to claim credit for the tax i paid to canada or should I use the tax paid as a deduction is schedule A (as mentioned by nelsona above)? which boxes to fill in and what numbers to use in each of these option?
If it makes a difference, my us income for 2009 was around 120K, with not much deductions (other than wife who does not work and 2 kids).
Thanks in advance,
Neal
My situtions is similar to what is discussed here.
I am a canadian living in the US. Before I moved I crystelized my RRSP investment and made it all cash ($150,000) within the rrsp (dec 2007). In 2008 i had some interest in the rrsp (about $3000). I had about $2000 in interest in 2009. Also in 2009 I collapesed the rrsp and paid the 25% withholding tax ($38,750) getting the remaining $116,250.
Now,
1. In 16a i will put $155,000, in 16b i put 5000. Correct?
2. I report $2000 to cali for 2009 (as I reported 3000 last year for 2008)
Q. Should I use 1116 to claim credit for the tax i paid to canada or should I use the tax paid as a deduction is schedule A (as mentioned by nelsona above)? which boxes to fill in and what numbers to use in each of these option?
If it makes a difference, my us income for 2009 was around 120K, with not much deductions (other than wife who does not work and 2 kids).
Thanks in advance,
Neal
I presume you have been filing 8891 and TD90 form?
1 and 2 are correct.
Use tax software to calculate 1116 and scedlue A in both methods.
1 and 2 are correct.
Use tax software to calculate 1116 and scedlue A in both methods.
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