Strategy to Collapse RRSPs and reduce tax

[springflower]

This forum is extremely helpful for me. Thanks for nelsona and other persons.

After read the border guide “ten key reasons to remove your RRSP from Canadaâ€￾ and “withdraw your RRSP freeâ€￾. I think it may be a good idea for us to collapse our RRSPs ASAP. I have contacted a cross border company, they told me that the consultation fee is about $2000 if they design a strategy for us to collapse RRSP and reduce tax. I think $2000 is a big money in current economy and not sure if it is worth to pay it.

Some background:
We are Canadian citizens, US residents. We have submitted EB2 us green card application recently. We left Canada in Dec. 2008. My husband is on H1b work visa and I am currently H4 visa and don’t work. Husband is 40 years old and I am 39 years old. We have two young children.

Husband info:
Salary plus bonus $150K annual income, contribute $10k to 401k yearly
RRSP value at time of our arrival in US (2008): ~US$70K (market), US$82K (book)
Current RRSP value: ~US$105K

My info:
not work now, $0 salary income. May start work and have salary after 2 years.
My RRSP value at time of our arrival in US (2008): ~US$115K (market), US$135K (book)
Current RRSP value: ~US$180K

Other info:
Our major deductions include our two kids, 2 parents, and mortgage (interest ~ $17k).

We have a non retirement joint account in us with $400k which generate about $10k dividend income.

I may go back to work with $80k~100k salary after 2 years (80% chance) or continue as a housewife (20% chance). We will probably live in US in near future. As in long term, we are not sure yet. Maybe we will stay in US (70% chance) or move back to Canada or Asian country after 5~10 years. I may want to retire early after 10 years and my husband may work part time after 10~15 years.

After a lot of research about RRSP withdrawal, I have some very basic idea how to withdraw our rrsp. However I know this area is quite complicated. I don’t want to screw it up. Please advise if these ideas are sound.

Question 1
Previously, we need to calculate the taxable rrsp income as “current market price – book value at departureâ€￾. However the fifth protocol changed as “current market price – market value at departure. Can I elect to use previous method as it is beneficial for me?


1. My rrsp

Step a.
Since I don’t work and no us salary income now, so I will withdraw about $15K~20k every year and file section 217 to get back most from the 25% withholding tax. And I can file NR5 earlier to reduce the withholding tax.

Question 2
Since we have joint account in us which generate dividend income, this will be a problem. How can I reduce this us investment income? Can I just say this is my husband’s income and not report it? Or I have to transfer money from this joint account to my husband’s account?

Step b.
If I start to work after 2 years, then I convert my RRSP into RRIF and withdraw periodically (twice minimum allowed) with 15% tax. Then claim foreign tax credit or deduction to reduce the taxable RRSP income tax. I guess I need to do a simulation on turbo tax to find if deduction or foreign tax credit works better. This periodical withdrawal will take long time, for example 10 years.

Question 3
If we have unused foreign tax credit to carry forward every year and in the end, any idea how to use it up? If I can generate enough foreign general income, then I can use it. But how?

Question 4
After 10 years, there will be small amount in RRIF. Then shall we just withdraw more and pay 25% withholding tax?

Step c.
If I stop work and no income, then I use method in step a again to withdraw.

2. My husband RRSP
He will use step b to withdraw his RRSP.

Any problem on our RRSP withdrawal on above plan? Any better suggestions?

More questions.
Question 5
I don’t know that I have to file the 8891 and TDF until now. I need to file them for 2008 and 2009. If I elect to defer to pay undistributed tax within RRSP on 8891, will it affect my RRSP withdrawal plan? It is irrevocable, so I have to be very careful.

Question 6
We have a non retirement account in US as I mentioned above. Is there any way we can use it to offset our RRSP withholding tax paid for RRSP withdrawal.

Question 7
I am not very clear about the RRIF periodical withdrawal yet. Anyone can point to a link which explains it in detail or with example?

Thank you very much in advance!
Springflower

[nelsona]

Your question is too long even for me too read.

I have answered ALL paossible questions related to RRSP withdrawals in this fourm. Read and come back with one or 2 specific questions abot what you caould not understand.

[springflower]

Hi Nelsona,

Sorry that the questions are long. I have done more research on previous posts. Now come up the following less questions.

1. I know I can withdraw ~$15k every year with section 217 while I don’t work for 2~3 years. Beside that, what is best strategy for our RRSP? Wait until retirement after 15 years or start RRSP collapse ASAP? If start now, will RRIF help for us?

2. I need to file the 8891 for 2009 and 2010 ASAP. I also want to withdraw $15k in 2010, which makes the 8891 file urgent. So I need to decide which is better, defer or pay as go on 8891?

3. We have dividend/interest income from a US joint account ~$400k in US, which increases my world income while file section 217. How can I avoid this world income? On the other hand, the account includes some Canadian mutual fund, can we take advantage of this investment income if withdrawing the RRSP?

[nelsona]

1. You can only withdraw 15K tax free if you have about $500 in medical expenses. A RRIF does not help you until you reach retirement age.

2. You are late in filinf 2009. 2010 is not due until next spring. File 2009 8891 NOW, defering tax.

3. You shouldn't be taking so much RRSP as to need to count the pennies at the end. I have no ides what you are talking about in terms of "the account includes some Canadian mutual fund, can we take advantage of this investment income if withdrawing the RRSP"

[springflower]

BTW, we live in Georgia with state tax 6%. And our marginal tax rate is 25%+6%, our effective federal tax rate is ~10%+6% in 2009.

springflower

[nelsona]

above, I meant $5000 in medical expenses.

[springflower]

Hi Nelsona,

Thanks very much for quick reply.

1. If I start to work after 2 years, what is best strategy for our RRSP? Wait until retirement after 15 years or start RRSP collapse ASAP? Suppose we collapse the rrsp soon and split in a few years. If we take the FTC (I haven’t done research for deduction yet), the total tax rate is probably 25% x 285 in Canadian tax + (31%-10%) x 68 in us tax = 90k. Is it worth to take out?

2. Sorry for my type error. I meant 8891 for 2008 and 2009. Ok, I will file 8891 for 2008 and 2009 ASAP with deferring election.

3. If the joint account in US generates US$8k passive income, my portion is US$4K. If I withdraw $10k RRSP, my net income/world income is less 90%, how it will affect my section 217 return? I guess I have to pay Canadian tax on $4K? However since I pay US tax on this income, so I can get foreign tax credit, thus no extra Canadian tax on it. Do I understand correctly?

[nelsona]

1. I am a big proponent of taking money out of RRSP in years when not working. But, if working, I wouldn't be too quick to take out RRSP, and would generally leave it until yearts when my income is low, if that is less than 10-15 years away.

3. There is no foreign tax credit allowed on a 217 return. there is a slight reduction in cdn tax simply based on your tax rate. Even if your RRSP income is less than %90 of world income, you will stillend up with much lower than 25% tax if you take out $10K.

You can use ufile to play with these amounts to see what the optimum amount of rrsp withdrawal would be to keep your Cdn tax lowest.

[springflower]

Hi Nelsona,

Thank you a million for valuable advice.

1. So I will only withdraw ~$10k yearly while not working. And Leave the rest of them till retirement.

3. So you don’t think it is a good idea to move our joint account in US to my husband’s own account? We may want to adjust some Canadian mutual fund in the account, which will generate even more capital gain (>$30k).

4. One more question. Do you think it is worth to pay a cross boarder expert $2000 for a RRSP withdrawal planning in our case? i.e. the tax saving using their strategy will be more than $2000? I had almost planned to use their service before I saw this forum. I guess that your answer is probably no. ;)

Springflower

[nelsona]

Your talk of Cdn mutual funds makes me nervous. have you not advised your Cdn broker that you are living in US. Typically US residents are precluded from buying Cdn mutual funds, or trading in an non-retirement account.


I'd be curious to know who is trying to offer you this service (sounds like keats). It will end up costing you more just to have your taxes done. And the stategy involves claiming investments held in canada and your RRSP as the same type of income -- passive, which the IRS disagrees, since it views RRSPs as pension income, which is general income, not passive. And involves the notion that just because the investment is held in canada, the cap gains it is Cdn sourced, which is not true.

I just saved you $3000 for free.

[springflower]

Sorry to make you confused. I hold Canada mutual fund (~$300k) in a joint US brokerage account, which was transferred in kind from Canadian brokerage account in 2009. Those funds are difficult to manage. I should have converted them to ETF. Now I plan to sell them to take advantage of the low capital gain tax rate in 2010. Who knows that’s the capital gain rate after this year. However this investment income will conflict with my plan to withdraw RRSP with low tax rate in 2010.

You are right. It is Keats. I feel their strategy is something like you said, however couldn’t figure it out by myself. Don’t understand why they will do it if it is wrong. Well, if it will cost me more, I will not do it. I will only do it if it saves me $. ;) Yes, you saved me big money. I am sure that you saved a lot of persons here big money too. You must be proud of youself. I couldn’t find anyone in Atlanta to help my cross-border tax issues. You help me clear up all the mess and give me clear suggestion. I sincerely thank you!

Springflower

[excan007]

Dear nelsona et al,

Do you have a good reference on why income resulting from collapsing the RRSP would be considered "general income" rather then "lump sum distribution" in the US tax return??

I have seen conflicting messages.

It does affect the foreign credit calculation

[nelsona]

Lump sum distribution is for specifically defined transactions.

Besides, it doesn't help that it would be in one category or another.

[excan007]

[quote="nelsona"]Lump sum distribution is for specifically defined transactions.

Besides, it doesn't help that it would be in one category or another.[/quote]

Thanks. But. Is there a precedence or IRS guidance which category to use. Actually there is passive income, general income or, lump sum.
It seems to make quite a bit of difference in TurboTax


Do we know which one is considered correct by IRS ?

Another thing is that may help with offsetting future Canadian source dividend (passive) income - such as dividend from Canadian REIT.

[nelsona]

Yes, general income, by elimination of the others. RRSP is defined as pension.

You are probaby not doing the 1116's correctly.

It is not passive income.