Non US resident IRA trading brokerage firms

[jixca]

So I'm about done my first year of US taxes and looks like a contribution of 5.5k will result in 1k+ refund.

I'm planning to open a Traditional IRA under TD Ameritrade for holding mutual funds, ETF, stocks etc.

Question, what happens to my IRA when I become a non-US resident person? I know there's the 30% withholding which I can plan ahead on withdrawal strategy but are there limitation placed by SEC on the brokerage similar to how non canadian residents cannot trade (buy) in accounts other than RRSP? I read many US brokerage firms also dislike dealing with non-residents.

This will affect my decision on the type of securities held within the account as well as choosing a brokerage that will keep the relationship once I leave US. I'm currently in US under TN and I'm under 30, so I think this opening IRA is still a good investment strategy.

[nelsona]

In your case a Roth would be a better decision, since you are ina relatively low tax bracket, the tax deduction isn't so much. Forego this for a lifetime of tax-free growth of that money whether you live in US or Canada.

[jixca]

Thanks Nelson, I actually never considered roth IRA and my top choices would have been traditional IRA and regular investment accounts.

My logic being that, my US stay will last 2-3 years and I'm single still, the traditional IRA helps lowering my taxable income and the regular investment may be tax free with my buy and hold strategy towards stocks (I'll probably stay away from mutual funds and ETFs since they get complicated when one becomes non US resident again) and I will sell winners only after returning to Canada.

Will maxing out my traditional IRA room for the next 3 years and then convert into roth IRA after 5 years be a better strategy? That way there's no 10% penalty on early withdrawal once I move to Canada but does the amount get taxed?

I'll also start to have 401k contributions so that can come into play in the future on withdrawal or conversion into IRA.

[nelsona]

As I said, if you are planning to return to Canada, you will never be in a lower tax bracket than you are now. If you put in IRA, and convert (and you must convert BEFORE returning to Canada, which is sometimes not possible)., you will be adding it to your tax return at that time. btw, there is never a penalty when converting from IRA to Roth, you don't have to wait 5 years.

Why bother. do not be fooled by the refund. This only means you should have had a better withholding rate, and are going to pay the tax later anyway, likely at a higher rate. think of the tax-free growth over the next 30 years.

[jixca]

I see, that make sense.

I thought the refund of 1.5k on putting 5.5k into IRA was a decent return but if I were to convert that 5.5k in 2 years into Roth I'll probably be subjected to a higher tax at that time, plus the early withdrawal penalty.

So buying 5.5k for roth IRA for 2016 and keep maximizing for future years is recommended if my timeline of withdrawal (contribution only) is 7-10 years from now? That way the 10% early penalty is waived and I can keep the earning inside the Roth IRA for whatever.

Also, can I use the 10k first time home buyer exemption for buying a house in Canada (after I return, so as to not set residency with CRA)? I'm not seeing explicit IRS statement on foreign property on this topic but not sure if there has been prior example.

[jixca]

Also, if I expect my year of return to Canada to have a employment gap (say 3 months without income) so my income for that year will be low, does it make sense to have Traditional IRA convert to Roth IRA that year?

[nelsona]

never look at a refund to make a decision. look at the DIFFERENCE between making a contribution and not making a contribution.

If you are in a 15% tax bracket, you are getting a 15% deduction. When you withdraw the money, you will be paying at least this rate on the contribution AND the growth, and it will be even higher if you are living in Canada.

And as I have already corrected you, there is no early withdrawal penalty on conversions from IRA to Roth, regardless of when it is done. the problem with IRA to Roth conversion is that straight tax will be owed on the entire transfer.

And even a home buyer exemption is only on the PENALTY. You are still taxed on the withdrawal.

And think long term with IRA and Roth. Not 3-5-7 years. Think 30.

[jixca]

So I've made a year in my company and can now contribute to 401k with employer matching up to 5%.

Question, I can do it pretax basis or after-tax Roth basis from my salary deduction. Is it still better to do it as Roth per the recommendation above given my single under 30 status and with an intention to return to Canada in 3-5 years?

[nelsona]

In my opinion, yes, because, you are in a relatively low tax bracket right now (compared to your future earning power, whether in US or Canada), and you are giving yourself 30+ years of tax-free growth on that money.