How to: IRA -> Roth IRA before returning to Canada

[joe_canuck100]

Canadian citizen, US resident.

I have an IRA worth $400K+ and have read on this forum that before returning to Canada one idea would be to roll the IRA into a Roth IRA.

a. I've checked online and talked with a Canadian / US tax guy concerning doing this and he mentioned that the 5 year rule means that I couldn't do it if I was returning to Canada in less than 5 years from today, as I would have to create the Roth IRA, put the full amount, or any part of it, into the Roth IRA, BUT before I go to Canada, that Roth IRA account would have to be changed? as I would now be a non-resident Roth IRA holder. Meaning that I wouldn't have held the Roth for 5 years before it changed status. Maybe it's just for the Canadian / US person meaning for him to trade the securities in the Roth for me once a resident of Canada but I'm confused on this. Does this make sense or can this be done successfully?

b. With the amount in the IRA high enough that it would be a lot of money to pay the taxes, penalty, etc., is there a better method than this? (ie: does it make sense to get it in to a Canadian RRSP directly once I leave)? I've also read about that method on this forum but get lost on the concept of tax credits in Canada and would they carry forward, etc?

Thanks for any help.

[nelsona]

The 5 year ruie refers to taking withdrawals once the Roth is created. There is no other class of Roth IRA for resident or non-residents. So the advice you got is suspect.

While it is a big sum, and you may wish to consider a smaller amount, you would only pay TAX on the rollover, no penalty.

Any other withdrawal, including a so-called transfer to an RRSP, would consitute an inelible withdrawl and would be fully taxed an penalized, if under 59.5.

And unless you are making about the same income in Canada as the transfer, your tax credit from US will not be effectively used.

That is why it is encouraged to be funding your Roth from the outset, so that one is spreading the tax bi=urden over several years. If you are not moving yet, you might consider partially rolling over some of your assets, whil staying in your current tax bracket.

Otherwise, you should probably just leave these funds as pension funds and take then whn you are not in high income.

[joe_canuck100]

Thanks Nelsona.

So, for good tax planning when I return to Canada, does it make sense to try to return in the early part of the year (ie: first month for example), have no other income, roll something like $100K from IRA -> Roth IRA in that month, file final tax return and pay the tax on that $100K?

I don't the numbers but let's say that's $20K in federal tax (and in a state that has no state tax) as it's considered income - and it's not such a big chunk of dollars to pay the taxman?

So that would be the end of the US side, I start residency in Canada and basically my tax year in Canada starts - for example - February 1.

Then after 59 1/2 taxable money can be drawn from the $300+ remaining in the IRA and non-taxable money can be drawn from the Roth IRA?

Thanks again.

[nelsona]

I don't know what you mean by "return in the early part of the year". Roth rollovers MUST be done before becominga Cdn resident. Returning (presumably from canada) for one month does not make you a Cdn non-resident.

But, in general, it would be best to remain in US until early in the next year, and then do a rollover, which would be your only taxable income for that year in US, and then commence Cdn residency.

The only caveat is if you are married, you may still benefit from full-year 1040 filing, which might complicate your return -- but the principle of having the rollover be your only US-sourced income would still be beneficial.

[joe_canuck100]

Thanks again.

That's what I needed to know ... and glad I asked of course.

[joe_canuck100]

One other question if you don't mind.

I also have Canadian rental properties that are positive on US taxes even after US depreciation is taken.

So using the example scenario of returning to Canada at end of January in a year, and converting $100k from rollover IRA to Roth IRA, whatever the net for the properties for the month of January + 1/12 depreciation allowed for year deducted would be my total income ( plus try to have more expenses in that January by early paying bills, etc ).

Correct?

Thanks again.

[nelsona]

Whne you leave in the early part of the year, you always have the choice to file a full year 1040, so you may find that simply doing the yearly income/expense will your final decision.

But, in the case where you decide to report only for one month, I would be making sure I track the income and expenses for that month very carefully. I'm comfortable with the 1/12th depreciation.