Following threads I know that an RRSP withdrawl is only taxed in the US on the appreciated amount since becoming a US resident.
What if I deposited 100K over the years and then left Canada to the US, over which time the value goes up to 180k.
If I withdrawl 90K this year and 90K next year - how do I calculate for the US what portion of the 90K is mine 16a -'nontaxable' and theirs 16b 'taxable'.
And this begs the question - can I withdrawl only the 100K portion 'mine' and pay no tax, and just leave the other 80K in the RRSP?
Thanx for your always informative response.
Denis
RRSP withdrawl -how much is 'mine'? how much is 'yours'?
Moderator: Mark T Serbinski CA CPA
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denisharlock
- Posts: 27
- Joined: Sat Feb 03, 2007 10:31 pm
First off, the amount that is considered 'investment in the account' ('mine'), is not necessarily only the $100K. It could be much more, since it really is the book value when you became taxable in US, which could be even more than its current value.
In any event,
I have seen a few methods:
1. Non-taxable first. If you have $100K non-taxable, the 1st $100K you take out is not taxable. This matches with how IRS treats the withdrawal of non-deductible IRA funds. The problem with this is that you get no credit for the Cdn tax you pay (only deduction). Works good for those able to withdraw RRSP tax-free in canada (ie. with a 217 return). I would suspect that the IRS would look more closely at one using this method.
2. Previously deferred income (taxable first). If you have been in US for some time, you will have deffered a certain amount of income by treaty every year. the same treaty states that that deferral only last until such time as the money is withdrawn, so you could report all growth as the taxable portion. This matches the treaty language best, and gets you some matching of foreign tax credits. It also allows you to keep a bigger non-taxable portion within your RRSP. So if you defferred $30,000 and withdrew $31,000, $30K is taxable, and your deffered balance is zero again. If you withdrew %28,000, its all taxable, and you still have $2,000 of deferred income left. This is the best method for californians, becuse of having to report income anyways. I have personally used this method for 5 years.
3. Proportional. Using your example, you would claim 8/18th of any withdrawl as taxable. Each year you would have to recalculate this percentage of course. This works best for those drawing of therir RRIFS for the next 30 years. yeilds good matching of credits. Mny accountants use this method for simplicity.
4. The General Rule method. Preferred by tax professionals (since they are the only ones that can figure it out) treats your RRSP like an annuity, and has certain charts and scales to determine what was taxable. Too complicated in my opinion. But is the one mentionned in Form 8891. Pub 939.
5. All taxable. The host of this believes that every penny of an RRSP withdrawl isd taxable. I know of no other cross-border type that subscribes to this belief. This makes anty RRSP withdrawl extremely expensive, as it adds bundles to your income, but only partially uses your tax credit, and kmakes your state tax bill bigger too. I only mention it for completeness.
The importnat thing is to keep good records of the book value when you became taxable, and to choose one method and stick with it.
In any event,
I have seen a few methods:
1. Non-taxable first. If you have $100K non-taxable, the 1st $100K you take out is not taxable. This matches with how IRS treats the withdrawal of non-deductible IRA funds. The problem with this is that you get no credit for the Cdn tax you pay (only deduction). Works good for those able to withdraw RRSP tax-free in canada (ie. with a 217 return). I would suspect that the IRS would look more closely at one using this method.
2. Previously deferred income (taxable first). If you have been in US for some time, you will have deffered a certain amount of income by treaty every year. the same treaty states that that deferral only last until such time as the money is withdrawn, so you could report all growth as the taxable portion. This matches the treaty language best, and gets you some matching of foreign tax credits. It also allows you to keep a bigger non-taxable portion within your RRSP. So if you defferred $30,000 and withdrew $31,000, $30K is taxable, and your deffered balance is zero again. If you withdrew %28,000, its all taxable, and you still have $2,000 of deferred income left. This is the best method for californians, becuse of having to report income anyways. I have personally used this method for 5 years.
3. Proportional. Using your example, you would claim 8/18th of any withdrawl as taxable. Each year you would have to recalculate this percentage of course. This works best for those drawing of therir RRIFS for the next 30 years. yeilds good matching of credits. Mny accountants use this method for simplicity.
4. The General Rule method. Preferred by tax professionals (since they are the only ones that can figure it out) treats your RRSP like an annuity, and has certain charts and scales to determine what was taxable. Too complicated in my opinion. But is the one mentionned in Form 8891. Pub 939.
5. All taxable. The host of this believes that every penny of an RRSP withdrawl isd taxable. I know of no other cross-border type that subscribes to this belief. This makes anty RRSP withdrawl extremely expensive, as it adds bundles to your income, but only partially uses your tax credit, and kmakes your state tax bill bigger too. I only mention it for completeness.
The importnat thing is to keep good records of the book value when you became taxable, and to choose one method and stick with it.
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
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denisharlock
- Posts: 27
- Joined: Sat Feb 03, 2007 10:31 pm
With respect to method #1, more specifically "This matches with how IRS treats the withdrawal of non-deductible IRA funds":
Please correct me if I am wrong but non-deductible IRA funds withdrawn from traditional IRA are taxed using proportional (#3) method. Withdrawing basis first tax and penalty free applies only to withdrawals from a Roth IRA.
I would like to use method #1 since we have a 217 return with little Canadian tax but would like to understand the validity of the method a bit better.
Thank you in advance for you response
Please correct me if I am wrong but non-deductible IRA funds withdrawn from traditional IRA are taxed using proportional (#3) method. Withdrawing basis first tax and penalty free applies only to withdrawals from a Roth IRA.
I would like to use method #1 since we have a 217 return with little Canadian tax but would like to understand the validity of the method a bit better.
Thank you in advance for you response
Yes, you are correct about the treatment of non-deducted IRA contribitions, the Roth analogy is more apt. nonetheless, the method is still possible, although I don't recommend it.
Once you choose this method, you are committed to it. That means once you use up the non-taxable amount in the account, you are 100% taxable in US.
We used 217 for my wife's RRSP (as soon as we left Canada) and over the 7 years we used method #2, and we were able to use all the Cdn tax, which is the goal. This gave us "just enough" taxable income in US to use up the little Cdn tax she paid. This gives you the flexibility of taking out more than normal, to accelerate collapse of RRSP.
This doesn't work so well if you have been in US a while, where I would then select the #3 average method.
Remember when you are doing 217 to include any medical expenses that EITHER of you have on the 217; this allows you to withdraw more tnan the personal amount tax-free.
Once you choose this method, you are committed to it. That means once you use up the non-taxable amount in the account, you are 100% taxable in US.
We used 217 for my wife's RRSP (as soon as we left Canada) and over the 7 years we used method #2, and we were able to use all the Cdn tax, which is the goal. This gave us "just enough" taxable income in US to use up the little Cdn tax she paid. This gives you the flexibility of taking out more than normal, to accelerate collapse of RRSP.
This doesn't work so well if you have been in US a while, where I would then select the #3 average method.
Remember when you are doing 217 to include any medical expenses that EITHER of you have on the 217; this allows you to withdraw more tnan the personal amount tax-free.
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