Pension transfer for US resident

[blah]

First off, I am aware that this is an incomplete picture of the financial situation and I am not a client of any firms. I am only seeking general advice.

The situation:
My wife is a dual-citizen and has been living in the US for almost 2 years now. She has ended employment with her company and we are figuring out what can be done with her pension plan. This is a very low amount: about $10,000 with and additional $6,000 transfer deficiency to be paid out in 5 years with interest or when the plan becomes fully funded.

Our goal:
Ideally, we would like to withdraw the money somehow and utilise it for a down payment on a house or to put in a retirement plan down in the US. The core goal though is to just get the funds out - especially due to the complications of having an RRSP while being a resident of the US.

Our options:
Place into a locked-in RRSP, LIF, or Immediate/Deferred Life Annuity. (locked-in RRSP seems to be the only choice here)

My questions:

From my research, it seems that the "easiest" way to do this is to transfer to a locked-in RRSP (BC province rules apply) and then claim non-residency status to withdraw the money out with a 25% tax penalty (plus anything additional that the US IRS will charge). Is this a correct assessment? Is there any other way out of this?

How does the $6,000 transfer deficiency complicate this?

Is there a way to open a locked-in RRSP without visiting a bank branch? - We are in the US and are not really able to make a trip back up to Canada for this.

Failing all of this, is there a firm that would be willing to help us out with our situation? (especially as we are talking about a relatively low amount)

Any other general advice?

If necessary, you can email me at junksnaddress at hotmail dot com. (I don't mind if the spam bots get a hold of that one)

[nelsona]

Since this is pension money, it has to go to some form of locked-in account.

Your current RRSP dealer in Canada (which he should already know you are in US) can open a LIRA, or LIF.

Then, as you say, you would break the lock by proving non-residency, and pay 25% tax (it is not a penalty, you were going to pay tax on this money anyways).

Then you report the entire amount on your 1040, and get some credit for the 25% tax you paid in Canada.

The deficiency payment only complicated matters in that it will still have to go into a locked-plan (unless you have been told otherwise).

My advice would be to leave that money alone until you have it all, then consider either taking the lump-sum at 25% tax (plus US and state tax), or maybe at that time converting it to a LIF, and taking out a true pension, paying 15% tax to canada, which would soften the tax blow. -- especially if she took it all in a year she does not work.

Only if she is not working in US would I consider taking a lump-sum, becuase this will be eligible for a special tax election in Canada which would reduce or eliminate the 25% tax (a 217 election, filed after the fact).

So, the key Q's are: Is she working this year (or expects not to work in some near-future year), and if not, what are her otion for the lump-sum coming now, and the extra bit later.


I wouldn't be looking at this money for a down payment or US pension right now, since it will cost you so much in taxes, and mortgages are cheap.

[blah]

So, a few things:

We do not currently have an RRSP dealer in Canada. All that she has is a regular bank account. Would you expect any issues accomplishing signing up for an RRSP without being at the bank branch? I currently have a few contacts at TD Bank who are going to hopefully get back to me with options. In theory, it *should* be doable with notaries and such.

She only worked part-time for the last 2 months of last year. Does last year factor into this at all? She is working currently, but for a relatively low amount. I know that I am being inspecific about the financial situation, but is there a possibility of softening the tax blow around this?

I am not sure how it is in Canada, but here in the US, we have something called "Mortgage Insurance". Essentially, if your downpayment is below a certain percentage of the sale price, you will get charged this fee which does not contribute to the cost of the home. This makes this money very attractive to get our hands on, as we do not want to purchase a house without enough of a down payment to eliminate the mortgage insurance.

So, to be clear, the "special tax election" you are referring to would mean that if we withdraw the money in a locked-in RRSP due to non-residency, we would still take the 25% hit. Then, we would elect to file a Canadian tax return and we would (ideally) get some of that 25% back, correct? What are the limits on this?

Since we have the deficiency payment, would it make sense to withdraw the ~10k as soon as we can and then withdraw whatever ends up in the RRSP after? After a call to the HR contact given to us, apparently the transfer deficiency will come to us after we get a letter sometime in the next 5 years. Though, they gave a lot of incorrect information, so I am not so sure how well I trust that bit of information. Like I said before, we are looking to get our hands on this money much sooner than in 5 years, as this would allow us to accelerate our current plans for buying a house.

I am not sure what you mean by the "what are her options for the lump-sum coming now, and the extra bit later. " question you have. If I have not answered it in this post, let me know.

Thank you very much for all of your help so far!

[nelsona]

There shpould be no problem opening an account without going to Canada. TD waterhouse will do this. The question is whether they will accept new monies. They would accept transfers of existing monies.

Given that you have no choice in how to obtain this money: locked0in RRSP, I don;t see how TDW could refuse you.
You will end up doing this twice, once now for the $10K, once later for the $6K.

A 217 election works best if her cdn income, the 10K, accounts for 90% of her world income. But even if it does not, therer would be some tax savings. But the money will still be highly taxed, since it will be added to the top of your incomes.

To be frank, I don;t think $5000 of tax is worth getting your hands on $5000 of cash. Its not going to make the difference in your plans, and if it does, than maybe you are stretching yourself to thin too fast. just my opinion.

[blah]

Alright. So here is an update on our current situation.

We currently do not see any way do accomplish setting up a locked-in RRSP without booking a flight up to Canada.

Things we have tried:

We contacted multiple people at TD bank - both at the branch where my wife currently has a regular bank account and the main corporate TD line. TD was working with us, but after a few days, the branch manager said there is absolutely nothing they can do. She contacted TD's compliance division and they said there was absolutely no way to accomplish this task - not through notarizing, lawyers, anything. There MUST be a physical presence at a Canadian TD bank. Canadian-notarized documents would be accepted, but not US-notarized documents. Apparently this same policy goes with TD banks, TD waterhouse, etc. Because this is an investment, it is extremely sensitive that it needs to have a physical personal verification of my wife.

So, we contacted RBC Wealth Management since they do seem to have an office around us. They were intially very willing to help and we were making arrangements to get this completed. However, today, their compliance department contacted them and basically had them put the emergency brake on this. They said that it is illegal to forward the paperwork to a Phoenix Arizona RBC Wealth Management office, have my wife sign the items there, complete any personal verification, and then courier the documents back to Canada. They have now said that the only way is for my wife to be present at a Canadian bank branch in order to set up the locked-in RRSP account.

Anyone have any ideas? We are out of options as I see it, and will likely be forced to book a costly flight up to Canada just to visit a bank branch.

[nelsona]

I would simply put the goal of unlocking the pension on hold. Then when you are planninga trip to Canada, have it done then.

Her firm is not insisting she take the pension now are they? I would be waiting til the extra money is kicked in and doing all this once.

The only other suggestion I already made would be if you alredy had an RRSP somewhere. You would be able to transfer this to TD waterhouse without physical presence in US -- because I did this in 2003. I guess what has changed (and I would remind you that treatment of eacjh person is VERY variable, so I would not give up on this) is no longer accepting US notarization.

In the end, with all the taxes you will pay, this is not a big sum of money that will benefit you greatly in the near future, so no need to further diminish its value by paying for a trip.

Sounds like there is someone in US that is raising your urgency on getting your (their) hands on this money. Patience.

[blah]

Well, that is the thing - we are currently being rushed. Her previous employer is insisting she take the pension now.

We received the paper and information about the pension about 30 days after it was dated. The problem is, the papers said that if they do not receive a response stating our elections within 60 days (which is 11 days from now - 9 if you factor in that they probably want it before the weekend for business days), the pension benefit will be automatically deferred.

The unlocking of the pension is not really the main concern right now. Currently our situation is that we need to create a locked-in RRSP for these pension funds to go into *ASAP* to prevent the pension funds from going into a deferred state.

After we create the locked-in RRSP and get all of the paperwork filled out, we surely can take our time to unlock the funds and take them to the US. Like I said, the problem is with creating that locked-in RRSP right now.

We do not currently have any RRSP somewhere - she just has regular Canadian checking (well, chequing ;) ) bank accounts.

[nelsona]

Did they explain what "deferred" meant?
I'm quite sure that the offer will be repeated when the extra money is put in, in which time you -- and your Cdn broker -- can be more prepared.

[blah]

All the papers say about it is this:

[quote]Deferred Pension Option:

Election of a deferred monthly lifetime pension at <date> of ~$270. Pension can be started as early as 10 years prior to Pensionable Age but will be reduced if paid early.

The latest possible date you can start collecting your <former> pension is the first of the month following the date in year which you turn age 65.[/quote]

There is nothing more said about it. I have called the HR Pension phone line multiple times and the people there are beyond useless. They will tell you essentially nothing, as that could be "financial advice". Which I could understand if it was anywhere near that. The questions I have been asking concern what the options actually mean, what interest rates apply, etc - things that they shouldn't have any issue explaining without going into financial advice.

[nelsona]

so it does sound like it would be a better idea to roll out of this pension.

Cost: one plane ticket, transport, time off work... wonderful. Blame TD waterhouse, becuase they CAN do this remotely.

[blah]

Yeah - we have now purchased a plane ticket.

Thanks for all of your help with this. It has certainly been an adventure... ;)