Blog post

Key Points

• Roth IRAs offer tax-free growth and withdrawals in the U.S., but Canadians face unique tax considerations.
• The Canada-U.S. tax treaty may protect Roth IRA earnings from Canadian taxation if handled properly.
• Reporting a Roth IRA on Canadian tax returns is essential to avoid penalties and double taxation.
• Contributions to a Roth IRA are not tax-deductible in the U.S., and Canadian residents should be cautious about additional contributions.
• Consulting a cross-border tax advisor is crucial for optimizing Roth IRA benefits for Canadians.

If you need help in reviewing your cross-border tax or investment situation, please feel free to reach out to us here. We look forward to speaking to you soon.

This post was created to provide information, perspectives, and strategies for Canadian residents who currently hold ROTH IRA accounts either within the US or in Canada (through a designated Canadian broker able to manage US assets).

If you need help moving your IRA to Canada, please contact me for more information on options.

ROTH IRA History (What is a ROTH IRA?)

The ROTH IRA, as we know it today, was initially proposed by two senators (one named William Roth) in 1989. The original intent (very similar to current rules) was to allow individuals to invest up to $2,000 into an account and have the earnings grow tax-free.

Some have criticized the government for allowing these accounts to continue, as the potential lost revenue from these types of accounts could be significant for future generations.

ROTH IRA Rules

Contributions to a ROTH IRA are not deductible against other income and must be funded with after-tax money. However, the internal earnings of the account will grow tax-free, and any distributions from the accounts will be tax-free. Penalties may apply to early withdrawals.

Other common rules include:

• By meeting several requirements, withdrawals from the account can be made tax-free.
• You can make contributions to your ROTH after the age of 70 1/2.
• You can leave money in your ROTH for as long as you want.
• Certain contribution limits apply.

Can you Bring your ROTH IRA with you When you Move to Canada?

The answer is both yes and no. As a newcomer to Canada, you’ll be able to keep your ROTH in the US, and assuming you make appropriate Canadian tax elections, you’ll have full tax deferral on the account.

You’ll only be able to actually move the account to Canada by using a qualified broker who can work within Canadian and US investment accounts. Note that although some investment advisors will attest that they have this ability, many simply do not.

Can Canadians Hold ROTH IRAs?

From a Canadian perspective, there are no rules that state that Canadian residents cannot hold ROTH IRAs. However, holding these accounts in Canada may be problematic for some US brokers or investment managers. Visit our directory here to find a cross-border investment advisor that can help you with your US ROTH IRA.

Additionally, your ROTH will be considered a foreign financial account that may be required to be reported on Canadian foreign disclosure forms (see the discussion of T1135 reporting requirements below).

What do Canada Revenue Tax Rules Say About ROTH IRAs?

Historically, these accounts have been treated as tax-free in Canada by virtue of the Canada-US tax treaty. Under Article XVIII of the treaty, if a distribution from a pension account (which it would qualify for) is considered to be tax-free in the US, it will also be tax-free in Canada. Considering that in most cases ROTH distributions are considered tax-free in the US, it would also be tax-free in Canada.

Canadian residents should also consider whether these accounts qualify for reporting under CRA’s T1135 foreign income verification rules. Under these rules, regular 401k and traditional IRA accounts are exempt from reporting requirements. It’s currently not clear whether this exemption relates to ROTH accounts as well. Considering the potential penalties involved in not reporting required accounts, adding these accounts to your annual T1135 reporting requirements may be a good idea.

Are there any Special ROTH IRA Elections to File with CRA?

Yes, in September of 2010, the CRA announced special rules related to a treaty election that needed to be filed to ensure the tax-free nature of the account in Canada. These rules are laid out in Income Tax Technical News 43 which can be viewed here. Simply put, you need to outline the following information related to the ROTH and send the election in a timely manner to CRA:

• Your name and address
• Your SIN and SSN
• Name of the plan holder
• Date the plan was established
• Date you became a Canadian resident
• Balance of the ROTH IRA at December 2008 or when you became a Canadian resident
• Amount and date of the first Canadian contribution
• A statement that you are electing to defer tax on the account under paragraph 7 article XVIII of the Canada-US Income Tax Treaty

Note that after this election is made, you will want to ensure no further contributions are made to the ROTH.

For a more detailed explanation on how to make the ROTH IRA election please click here.

Can I Late File a ROTH IRA Election?

Yes, I received confirmation from the competent authority that they are allowing individuals to file late ROTH IRA elections assuming the election under Article XVIII of the Canada-US treaty is not yet “tainted” because of a contribution to the plan after moving to Canada or after the election rules came into place.

You can view the confirmation of the late ROTH IRA election here.

Is there a Canadian Equivalent to a ROTH IRA?

Yes, in fact there is. The Canadian Tax-Free Savings Account (often referred to as TFSA) is a very similar type of account. Likely to have been created because of the ROTH accounts in the US. Although similar in nature, the TFSA accounts do vary in specific tax rules.

Should I Collapse my ROTH IRA?

If you are planning on moving to Canada or are currently in Canada with a ROTH, you may be asking yourself whether you should simply collapse your ROTH. In many cases, the opposite is advantageous. Considering you will be able to withdraw any funds from the account tax-free in Canada (and for US tax purposes), it’s often advantageous to contribute or transfer as much into your ROTH IRA from other retirement accounts before you move to Canada. Proper planning is required to ensure you transfer the assets in a tax-efficient manner. More on these potential transfers below.

Should I Transfer my 401k or Traditional IRA to a ROTH IRA?

As with most tax planning questions, the answer to this question will vary depending on the facts of the individual asking. That being said, some general considerations for transferring your 401k and traditional accounts to a ROTH are as follows:

It may be advantageous to transfer 401k and IRA money to your ROTH if, in that particular year, you feel like your income is below average. Paying a lower rate of tax on money withdrawn out of a traditional IRA or 401k and contributing to a ROTH will allow you to withdraw the funds at a later date tax-free. This transfer can often be quite beneficial for those thinking of moving to Canada. Transferring money to your ROTH before you become a Canadian resident can potentially save a fair amount of future tax dollars.

It’s important to remember that these transfers need to be reviewed by an investment professional before being made, particularly when it comes to cross-border investment issues.

Can I Give (through my will) my ROTH IRA to my eventual beneficiaries?

Yes, you can gift the ownership of your ROTH to named beneficiaries. This is particularly advantageous as the recipient will be able to stretch the payments over their lifetime.

The account needs to have been owned by you for more than 5 years to ensure the transfer is tax-free, however.

Assuming the inheritance is considered tax-free in the US, it should also be considered tax-free for Canadian purposes pursuant to the Canada-US tax treaty.

Can I transfer my ROTH IRA to my RRSP?

Unfortunately, there are no Canadian tax provisions that allow you to transfer or convert your ROTH IRA to an RRSP. Rules do exist, however, that allow you to rollover your existing traditional IRA or 401k to an RRSP.

Do I Pay Tax on ROTH IRA Distributions in Canada?

In most cases, you will not pay tax on ROTH distribution in Canada, assuming the following two conditions are correct:

• The full amount of the distribution is also not taxable in the US
• You have made a proper election under Article XVIII of the Canada-US tax treaty as described above

How Can I Get More Information on ROTH IRAs from a Canadian Perspective?

Cross-border tax rules and how they relate to Canadian and US law can be difficult to understand and interpret. The penalties for mistakes made on filing, transferring between retirement accounts, and making incorrect distributions can be significant.

If you have questions about your cross-border investments, tax plan, or any other cross-border matter, please contact our cross-border investment advisors and they will be glad to assist with any issues you may have.