Should I convert my IRA before moving to Canada?

04 February 11
Cross Border Tax Q&A

Question

Hello,

I have a question…I’m planning on moving to Canada (I’m a US citizen) in the next few months and I’m wondering whether I should convert my existing IRA ($200,000) to a ROTH IRA or enter Canada and roll it into an RRSP.

What are your thoughts? What are the tax implications?

Thanks

XXXXX

Answer

Hi XXXX

I can probably give you some tax guidance with respect to you IRAs without the exact figures.

You have a few options with relation to the IRAs:

  1. Keep them intact when you enter Canada and possibly roll them into an RRSP.
  2. Keep them intact when you enter Canada and do nothing.
  3. Convert them to a Roth before entering Canada.

Here’s a breakdown of all three options. Consider however that there is no “right answer” as the tax consequences of either option will change depending on your specific set of financial goals and estimates.

Option #1:

If you choose to keep the IRA when you enter Canada you’ll have the ability to cash out the IRA and roll it into an RRSP within 60 days. This will result in a 10% penalty to the US and taxes payable on the distribution to the US and Canada. You will get an offsetting deduction in Canada for the RRSP contribution.

Essentially you will be paying US tax + 10% penalty on the distribution from the IRA. If you have other foreign income you may have the ability of claiming the US taxes against your Canadian taxes as a foreign tax credit (a bonus if you have other foreign income).

The funds inside the RRSP will be sheltered from tax in the US and Canada until they are distributed from the plan, at which time they will be taxable in both the US and Canada.

Option #2:

If you leave the IRAs intact when you enter Canada you’ll be able to defer Canadian and US tax until funds are distributed from the plans. This can be a great growth strategy if you plan on withdrawing the funds in later years when you income is lower. However, the distribution will attract Canadian and US tax when they are eventually distributed from the plan.

Option #3:

You can convert the IRA to a ROTH IRA before entering Canada. By converting the account to a ROTH you’ll pay US tax on the distribution. Once the funds are in the ROTH they will remain non-taxable if they remain in the ROTH and the distributions will also be non-taxable.

Hope that helps. Give me a call if you want to discuss further or if you need help completing your dual status tax returns.

Regards

Phil

Phil Hogan, CA
250-661-9417

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.

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