Some of the most popular questions we field is “should I withdraw my IRA?” or “Can I move my IRA to a Canadian RRSP?”. Unfortunately, the answer to these questions requires considerable thought and a thorough understanding of your unique financial situation to see what opportunities or obstacles exist. There simply is no general answer for all.
One fact to confirm is that you can move your IRA to a Canadian RRSP. The current rules and regulations do allow an IRA to be rolled over into a Canadian RRSP but how you are taxed depends on whether you are a US citizen, Green Card holder or not. If you are a US taxpayer, you are taxed on the full amount withdrawn plus any early withdrawal penalties that may apply. The other thing to consider when moving your IRA is once you have withdrawn it, what will you do with the money? If you relinquish your tax residency in the US, you can consider moving your IRA to Canada at a flat 15% Treaty mandated withholding rate in the US. The entire distribution is taxable in Canada but with proper planning, the distribution can be offset with an RRSP contribution that will result in a deduction on your Canadian return, resulting in no tax payable in Canada except for the 15% withheld. This is a complicated strategy and a qualified transition planner should sought beforehand. The answer depends, again, on your individual financial situation and what your overall goals and objectives are.
Some people decide just to leave their IRAs in the US and forget about them, because moving your IRA can be difficult. That may be a prudent strategy, rather than moving your IRA, depending on what you are trying to achieve. Here are some other considerations:
- By becoming Canadian residents and not moving your IRA, you are subject to the possibility of a double estate tax on a continuing basis. The Canada/US Tax Treaty does not allow offsetting credits between IRA/pension-type income declared in Canada and US estate taxes, in effect, creating double taxation.
- The US Securities and Exchange Commission has some regulatory requirements restricting some American brokerage firms from selling investments to Canadian residents. This may mean your account is prohibited from conducting any transactions, unless your advisor/broker is registered in Canada to render advice to a Canadian resident.
- There are several administrative duties you must fulfill every year as long as you keep any accounts in the US. First, you are required to report these accounts on your tax return to the Canadian government. This should not be missed under any circumstances since the penalties for doing so are severe.
- There is also currency risk you could incur. If you are intent on retiring in Canada, it means your future expenses will need to be met with Canadian loonies. If you leave a large part of your assets in American currency, it exposes you to unnecessary currency risk.