Help please. I have inherited a U.S. traditional IRA (I am Canadian, living in Canada)

03 July 24
Cross Border Tax

Question

Dear Mr. Hogan,

I hope you had a nice weekend.
I’m sorry if I’m bothering you. I have read and watched several of your informative links on your website. Thank you for posting them. Your wealth of information is amazing and comforting. I had called the number listed, and your voice mail suggested the best way to reach you is via email.
I don’t know if you are still open to answering questions regarding inheritance from the U.S.

I am a Canadian citizen, and have always lived in Canada. My parents moved to California when my dad was transferred by his company over 25 years ago. He worked in California until he retired, and they continued residing in California.

They were both born in Canada, were Canadian Citizens, and then became American Citizens 35 years ago.

They never returned to live in Canada, only coming to visit family and friends.
Sadly, both my parents have passed. My Dad passed away 7 years ago, and my Mom has now passed away as well.

My Mom had a traditional IRA, which she inherited when my Dad passed.
I wasn’t aware of the IRA until recently, and I honestly don’t know what to do about it.

This traditional IRA is still in my Mom’s name. I have been told that it will remain in my Mom’s name until I file the IRA claim paperwork, for this inheritance, with my Mom’s financial advisor in California.

He said that I have 10 years from my Mom’s passing to claim and withdraw the money.

It is approximately $260,000.00 U.S.

He is very nice, but hasn’t been able to give me much information that would help me with this. He did say that once I complete the paperwork, tax documents would be generated and sent to me.

No one has been able to give me much information.

I have had a very difficult time dealing with my Mom’s passing. We were extremely close, but I wasn’t able to see her since the summer of 2019, due to covid and health issues I had. She passed in December of 2021, and I have been unable to talk about it. I know it’s not healthy, but talking about it makes it real, and I can’t cope with it emotionally.

I know I can’t continue to bury my head in the sand, and I’m working on that.
But now I know I have no choice but to figure out what to do with this money.
Is there any information you could please give me as to what I should do with it? How can I bring it to Canada? What are the tax implications in the U.S. and Canada?

I will be 62 in January, and am still working. I work as an educational assistant in an elementary school, supporting students with special needs. I make approx. $52,000.00/year. I love my job, but the physical requirements are becoming too much for me, and I hope to retire this year.

Any help would be greatly appreciated.

I don’t know what to do. Where to start. I’m just overwhelmed by all of it.
I’m sorry to bother you with all of this.

I hope you have a great day, and hopefully you’ll be able to provide me with some guidance and course of action.

Sincerely,
XXXXXX

Answer

Hi XXXXX

Thanks for the email and for the kind words about my content.

Sorry to hear about the passing of your parents. I know what you’re going through, I lost both my parents in the last few years.

This is not financial or tax advice, but let me give you some guidance on your situation:

You’ll have a few options for the inherited IRA:

  • Because the IRA was inherited it won’t be eligible to be transferred to an RRSP
  • You can cash out the full IRA and pay Canadian and US tax
    • You’ll pay 15% US tax at source and Canadian tax at your marginal rate
      • Given your income below you’ll likely pay between 30% and 35% on the IRA distribution
      • This would be your total tax liability including the 15% US tax credit for Canadian purposes
  • You can leave it in the IRA and withdrawn the full balance within 10 years
    • Assuming you don’t need the capital this often is the most tax efficient option as it will allow you to smooth out the distributions over 10 years at much lower marginal tax rates (about 23% for BC) for your income levels.

You can leave the IRA invested with the US advisor; however, I always suggest Canadians move their IRA up to Canada to be managed by a competent cross-border wealth manager.

If you would like to discuss your options in more detail feel free to take advantage or our complementary cross-border consultation here.

Hope that helps.

Cheers

Phil

Phil Hogan, CPA, CA, CPA (Colorado)

Phil Hogan is a Canadian and US CPA working with clients throughout Canada and the US. Phil advises on cross border tax and financial planning matters. Phil can be reached at phil@beaconhillwm.ca or via telephone at 250-661-9417. You can also read more about Phil at www.Beaconhillwm.ca/team/about-phil/

This commentary reflects the personal opinions, viewpoints and analyses of the Beacon Hill Wealth Management Ltd. partner providing such comments, and should not be regarded as a description of advisory services provided by Beacon Hill Wealth Management Ltd. or performance returns of any Beacon Hill Wealth Management Ltd. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Beacon Hill Wealth Management Ltd. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Any discussion about taxation is for educational purposes only and should not be viewed as professional advice. Consult your tax professional for tax advice on your particular situation.

Leave a comment

Your email address will not be published. Required fields are marked *