RRIF or IRA SEPP for supplemental income?

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riskybiz64
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Joined: Mon Jan 25, 2016 1:58 pm

RRIF or IRA SEPP for supplemental income?

Post by riskybiz64 » Tue Jan 14, 2020 6:33 pm

US resident (dual citizen, Canadian non-resident) with RRSP assets in Canada and IRA/401k assets in US. Age 55, in US for 14 years now. Almost all "liquid" assets are in tax-advantaged accounts. Plan to retire early at around 60 and start drawing down those funds, but until then, may need to supplement employment income to pay kids' college expenses, etc. and minimize total tax paid on that income.

I see three possible options:

1) If I convert some of my Canadian RRSP accounts to a RRIF, I understand I can take some level of withdrawal (up to 2x the required RRIF minimum withdrawals) at a 15% non-resident withholding tax and presumably, pay tax in the US based only on the "returned earnings" portion of the withdrawal (since US does not tax "basis" for RRSP/RRIF withdrawals). I understand I'd be locked into minimum withdrawals on the RRIF forever, but they would start out at a pretty low level of [1/(90 minus age)] until I reach age 71, when the heavier minimum withdrawal schedules would kick in.

2) Alternatively, I could set up a 72t-compliant SEPP by rolling some of my IRA or 401k assets into a separate IRA for this purpose, knowing that I can discontinue the SEPP payments after 5 years, but would pay tax at my full marginal rate -- probably 24% -- in US (since I'll still have employment income), and I'd be locked in to taking a set amount for those 5 years. After that, I could stop the payments, and be fully flexible since I'll be over 59-1/2.

3) Third option would be simply to take a lump sum distribution as needed from my IRA to pay Qualified Higher Education Expenses, which would not lock me into a long-term withdrawal plan, but I'd be limited to the amount of QHEE each year, and taxable at my full marginal rate (but not subject to the 10% penalty tax due to the exception for QHEE payments).

Any traps or strong advantages / disadvantages to any of the above?

(P.S. I plan to exhaust remaining 529 education savings plans before tapping any retirement accounts - how long that will last depends on where my daughter decides to go to school)

nelsona
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Re: RRIF or IRA SEPP for supplemental income?

Post by nelsona » Wed Jan 15, 2020 10:05 am

The RRIF option is the better one. I would convert ALL the RRSP to a RRIF. This allows you to pull 10% a year at 15% Cdn tax, and use this tax as either a credit or a deduction depending on how much of the RRIF is taxable in US.
If you move back to Canada, you can always reconvert it to RRSP.

Any other option results in extreme taxation on the income you are pulling out, so is not really viable. and is demolishing your retirement. You can always borrow for most things, but not retirement.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

riskybiz64
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Re: RRIF or IRA SEPP for supplemental income?

Post by riskybiz64 » Fri Jan 17, 2020 11:25 am

Thanks. Am I correct on the US treatment of RRIF withdrawals being taxed only on the earnings portion? There was no tax paid in Canada on the contributions (one of which was LIRA from a Canadian DB pension rollover in 2016), so why wouldn't the entire amount withdrawn be subject to US tax? Seems generous to tax in US only on the accumulated earnings portion.

FYI, we have been deferring (filing IRS form 8891 every year when it was still required) and we consolidated / rebased my RRSP accounts when we moved to the US in 2006.

nelsona
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Re: RRIF or IRA SEPP for supplemental income?

Post by nelsona » Fri Jan 17, 2020 3:25 pm

The LIRA, and any portion of it that was put into your RRSP is 100% taxable. Any other RRSPs, are only taxable beyond what they were worth when you moved to US.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

nelsona
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Re: RRIF or IRA SEPP for supplemental income?

Post by nelsona » Fri Jan 17, 2020 3:27 pm

The reason RRSPs are not fully taxable is because they were not viewed as sheltered accounts. So, like if you brought a bag of money into IUS in 2006, why would you need to pay tax on that bag. You on;y pay tax on the income it subsequently generates.

LIRAs on the other hand come from pensions, which are always fully taxable on withdrawal in US, even if converted to an RRSP before you came to US.
Nelsona Non grata. Non pro. Search previous posts. Happy Browsing :D

riskybiz64
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Joined: Mon Jan 25, 2016 1:58 pm

Re: RRIF or IRA SEPP for supplemental income?

Post by riskybiz64 » Sat Jan 18, 2020 9:07 pm

Didn't realize that the RRSP / LIRA distinction was made for US tax purposes. I suppose that makes sense, the RRSP contributions were "my" money, the LIRA rollover was from a non-contributory pension. Thanks for clarifying.

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