RRSP step up cost basis for cash?

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hyperbling
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RRSP step up cost basis for cash?

Post by hyperbling »

Hello, I read a lot of advice about stepping up your cost basis to reduce taxes when moving your RRSP into the US.

Dumb question....if everything in my RRSP is in cash form already (not invested in any securities whatsoever), or if I sold everything prior to departure, then that is effectively the same as "stepping up" right? And I would be able to import the entire amount tax free (for IRS purposes).

Thanks for clarification.
nelsona
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Post by nelsona »

Correct, cash is always considered as having the same cost basis as it current market value. Just to clarify the taxation of RRSP in US has nothing to do with "importing" or "moving" your RRSP to US.

Taxation is triggered (in both canada and US) when you withdraw the funds from your RRSP, regardless of what you do with the money afterwrds.
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Jaspal
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Post by Jaspal »

[quote="nelsona"]Correct, cash is always considered as having the same cost basis as it current market value. Just to clarify the taxation of RRSP in US has nothing to do with "importing" or "moving" your RRSP to US.

Taxation is triggered (in both canada and US) when you withdraw the funds from your RRSP, regardless of what you do with the money afterwrds.[/quote]
Is it correct that on withdrawing funds from an RRSP tax in the US is only on the capital gains if something is sold, and no tax if cash at the time of change of residency. Further, can 25% tax withheld in Canada on the entire amount withdrawn be used against foreign tax credit.
nelsona
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Post by nelsona »

If you had cash at time of residency, there is possible US tax at withdrawal due to 2 dfactors. First there is any interst that was paid into the RRSP, second, and more importantly, there is capital gains (or loss) on the currency exchange rate change between the time you moved to US and the time you collapsed RRSP.

The entire 25% tax withheld can be used on Form 1116 towards the US tax payable on your RRSP income. However, usually this is very little if only a small portion of your RRSP is taxable in US, so the result will be very little credit given.

Thus it is often best to simply use the 25% tax as a deduction of schedule A instead.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Jaspal
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Post by Jaspal »

[quote="nelsona"]If you had cash at time of residency, there is possible US tax at withdrawal due to 2 dfactors. First there is any interst that was paid into the RRSP, second, and more importantly, there is capital gains (or loss) on the currency exchange rate change between the time you moved to US and the time you collapsed RRSP.

The entire 25% tax withheld can be used on Form 1116 towards the US tax payable on your RRSP income. However, usually this is very little if only a small portion of your RRSP is taxable in US, so the result will be very little credit given.

Thus it is often best to simply use the 25% tax as a deduction of schedule A instead.[/quote]

Assume a security was bought in RRSP in 1998 for $10,000. Status was change to non-resident in year 2002. This security is sold in year 2011 for $15,000, and cashed out. Canada will deduct 25% or $3750 as tax. For US taxatuib is it correct to show $5000 as capital gain, which may attract some tax based on overall tax position. However, can us tax be reduced by $3750 as foreign tax withheld. Further can such foreign tax credit be claimed even when the security was sold at a loss. How does Section A differ from other choices.
nelsona
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Post by nelsona »

Please do not "quote" the previous posts, quoting doesn't work and it merely clutters the thread.

For IRS purposes, RRSP income is not capital gains, it is pension income, so you would show $5000 of pension income. This is done by properly filling form 8891

So, the $5000 income would be reported on 1040, and then
EITHER:

a) The $3750 Cdn tax would be used on form 1116. You would not get anywhere near $3750 in credit however, since the credit is limited by many factors, especially your US taxrate. What is leftover is carried forward until you have other foreign income

OR
B) you use the entire $3750 as a dedcution on Schedule A, as foreign tax.

If in the example above the investment was sold at a loss, then you would report no income, and thus no credit would come your way. You would simply use the Cdn tax as a deduction on schedlue A in that case.

In any event, when you are deciding whther to use the income as a credit or as a deduction, you need to run both choices and see whaich is most beneficial.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Jaspal
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Post by Jaspal »

It appears that loss in an RRSP cannot be used to offset against other US income. In that case, will it be better to sell some assets within an RRSP which have had more gains than the loss in the losing asset, so that there is net gain which can be shown as pension income 8891. Also, it appears that it is always beneficial to use 25% tax deducted on Schedule A as foreign tax paid as it would directly reduce US tax.
nelsona
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Post by nelsona »

Be careful, if you are only partially collapsing an RRSP, then the gains and losses within the account are to be factored in in determining what you need to include in your tax.

So, a portfolio, that has grown $20K since arrival in US, will attract some taxable income when you take a portion out, even if the actual investment you sold was a loser at the time you sold it. The RRSP is treated as a basket.

ASecond, consider that while a deduction may seem attractive, in that it gives you tax relief at your marginal taxrate (this could be as little as 15%) , it must be used in that year, and you must be itemizing to use it.

The credit however can be acrried forwars several years, perhap to a year when you will have more taxable income from the RRSP, or if you have other Cdn income in other years (like small employement income).

Looks like you are having trouble coming up with what your IRS taxable income is when you partially collapse an RRSP.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Jaspal
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Post by Jaspal »

I have several depreciated and some appreciated securities in my RRSP. I am not immediately planning to do anything but am just investigating into future strategies for minimizing taxes by selling losers if that works in my favor. Ultimately I want to collapse my entire plan over several years while still working in the US.

I am not sure if commercial s/w such as Turbotax have RRSP treatment in them. If so, perhaps best approach may be to try out some scenarios.
Jaspal
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Post by Jaspal »

I looked at form 8891. I am now even more confused. It seems to ask for taxes even on undistributed interests, dividends, capital gains etc. On this form while you have to show "Distribution from the plan" which I guess means total money taken out, and Taxable distribution for which it refers to some complex method of calculation. All this doesn't seem to suggest that we need to worry about tax on gains or incomes only.

Isn't it true that from IRS perspective an RRSP is nothing but a trust account, meaning you pay taxes on interests, dividends, capital gains etc, and if you have a capital loss it would be offset against other US current/future capital gains, or against current year's earned income upto $3000.
nelsona
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Post by nelsona »

If you more carefully read Form 8891, you will see that -- if you elct to defer taxation -- you STOP at a line well before having to report undistributed income.

Back to your other issue of determining taxable income. Form 8891 does not do this for you. It merely asks what you have at the end of the year, and if you withdrew any funds.

I have outlined several acceptable methods before on how to determine the US txable portion of a withdrawal, I'm not going to outline them here. The 'best' one to chose depends on how long you have had the RRSP in US, how Canada is taxing it, and how quickly you will be collapsing it.

What you need to be is consistent from year to year, and, by the end, have reported the entire taxable portion, that is What you withdrew minus what you came down to US with.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Jaspal
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Post by Jaspal »

Thank you Nelson. I'll re-read 8891 and other forms. I thought to read it to stop at a certain point if you checked the Annuity box. Any reference to your past inputs, or IRS code sections will be helpful. Over the next year I'll try to read in detail and test run some scenarios with Turbotax. My RRSP values some $120k, has total book value of $170k, with several security at a loss and some with a gain.
nelsona
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Post by nelsona »

As I said, the internals of yopur RRSP do not matter to IRS. In your case, you can withdraw the first $170K tax-free. If at the end, you have only withdrawn, say, $150K, you can clim the $20K loss on schedule A as well, but only once ALL your RRSps are collapsed.

So, what you need to be doing is reducing the Cdn tax on your RRSP, by probably converting it to an RRIF and taking out 10% a year -- this will only be taxed 15% in canada.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
Jaspal
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Post by Jaspal »

Thank you Nelson. Your valued input is really appreciated.

With 10% or so widhdrawl each year, do I need to submit 8891 each year, and show something on my 1040? Perhaps I need to read and understand the process thoroughly before I try anything. Any references will be helpful. Is there a guideline at IRS site or elsewhere on the subject?
nelsona
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Post by nelsona »

You ALWAYS,ALWAYS need to submit 8891 for every RRSP and RRIF that you have, with the final one being in the year you collapse the last account. this is whether or not you take distributio, or whether or not you have taxable income.

Youalso need to include these on TDF forms.

Surely this must be claer by now. You ahve been visiting this site for SIX YEARS.

And by filling in 8891, that will lead you to reporting gross and net pension income on line 16.
nelsona non grata. Non pro. Please Search previous posts, no situation is unique as you might think. Happy Browsing :D
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