Moving Your RRSP/RRIF
One myth to dispel is that of moving your RRSP/ RRIF to a US IRA (Individual Retirement Account). The current rules and regulations simply do not allow a Canadian RRSP to be rolled over to an IRA while maintaining the tax-deferred status in both countries. Your only alternative is to collapse the RRSP and transfer the cash to the US and then make an IRA contribution or leave your RRSP in Canada. Of course, you need to be aware of the tax implications before doing so as you can end up being double-taxed. The other thing to consider is when you have developed a prudent withdrawal strategy, what is done with the money? The answer depends, again, on your individual financial situation and what your overall goals and objectives are.
Moving your RRSP/ RRIF can be daunting and some people decide just to leave their accounts in Canada and forget about them.
Before doing so, you need to consider the following:
- Currently, your maximum tax rate on your RRSPs is cut almost in half to only 25% compared to withdrawing it if you lived in Canada. Under current rules, solid foreign tax credit planning can reduce the effective withholding rate on moving your RRSP/ RRIF to less than 25%. The degree to which you are able to reduce your effective withholding rate is dependent on many factors, such as the timing of RRSP withdrawals and the amount of other foreign income. Foreign income can be generated within your investment portfolio, but the amount is dependent primarily on your risk tolerance and foreign interest rates. The key is not to let the tax tail wag the investment dog.
- By becoming US residents and not moving your RRSP/ RRIF, you are subject to the possibility of a double estate tax on those assets. The new Canada/US Tax Treaty does not allow offsetting credits between RRSP/pension-type income and US estate taxes, in effect, creating double taxation.
- The US Securities and Exchange Commission has regulatory requirements barring Canadian brokers from selling investments to US residents unless your Canadian brokerage firm has registered in your state of residence. This typically means you will only be able to SELL investments in your RRSPs/LIF. You will not be able to make any new purchases (see Keeping Accounts in Canada for more details).
- There are several administrative duties you must fulfill every year if you are not moving your RRSP/ RRIF. First, you are required to report these accounts on the required form to the Department of the Treasury each year. Second, other IRS compliance forms are required in any year you make contributions to, or withdrawals from, your RRSPs. You must also take the appropriate Treaty election annually to defer the income inside the RRSP. These 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 to the US, it means your future expenses will need to be met with US dollars. If you leave a large part of your assets in Canadian currency, it exposes you to unnecessary currency risk.
- In general, Canadian mutual funds cost you more than twice the management and administration fees than do comparable US mutual funds. Therefore, a substantial annual reduction in your investment expenses is available for your portfolio on the US side of the border if you are considering moving your RRSP/ RRIF investments. For example, $100,000 in Canadian mutual funds would cost you approximately 2% to 3% or $2,000 to $3,000 per year, whereas a US mutual fund would be approximately 0.25% to 0.75% or $250 to $750 per year or less.
- One final risk that you take by not moving your RRSP/ RRIF is that of government risk. In other words, you are at the mercy of the Canadian government’s ability to change, for example, the withholding or other relating rules. A number of years ago, non-residents could have withdrawn their lump sum RRSPs at a net withholding rate of 15%. Now the withholding rate is 25%. What it will be in the future is uncertain at best.
- Finally, simplifying your life by consolidating all of your assets in the US at one brokerage firm has benefits most don’t realize until they do it. With a simplified financial picture, it makes understanding it easier which allows you to have more control over what happens. This tends to reduce stress and bring a lot of peace of mind to you.
- There are many questions surrounding how to go about moving your RRSP/ RRIF to the US. In a lump-sum? In stages? Using the minimum withdrawal amount? 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.