Should I convert my IRA to a ROTH IRA before moving to Canada?

09 July 18
Cross Border Tax

Question

I’ll be moving to Ottawa from Boston late this year and I’ve been working through some financial planning with my broker. While doing some research online I came across your cross border tax articles, specifically the ones outlining IRA conversions.

I have $200,000 in IRA that are eligible for a ROTH conversion. Is this something I should be considering before making the move to Canada?

I would be happy to pay for a consultation if that would be easier

Kind Regards

XXXXXX

Answer

Hi XXXXX

We should definitely setup a time to discuss your plan in more detail considering the potential complexity of the move. Not only from a financial planning perspective, but from a tax perspective as well. Significant upfront planning is recommended for any American thinking of moving to Canada, often regardless of the amount of assets owned before making the move up.

With respect to the IRA you have a few options. One of which, which you outlined below is the potential for an IRA conversion. In this case you’ll convert some of the existing IRA to a ROTH IRA. Going forward any distributions from the ROTH will not be taxable in the US and would also be tax free for Canadian purposes assuming you make the appropriate ROTH IRA elections with the Canada Revenue Agency. This election is required to be filed with the first year’s tax return upon entering Canada (not due until April of the year following your entry to Canada).

In most cases however there will be little benefit in making the IRA conversion and perhaps even additional tax owing if not properly planned. In order for the strategy to result in tax savings your tax rate should be lower in the year(s) you convert the IRA before entering Canada. If not you’ll simply end up paying more tax initially on the IRA conversion. For example, if in the year before you enter Canada your average US tax rate is 30% and upon entering Canada your overall tax rate will be 20%, you’ll pay 10% more in tax on the conversion. If the tax rates are switched in the above scenario you’ll experience a 10% tax savings. This is only a very simple representation of the cross border tax mechanics of a ROTH conversion and full estimates and planning should be performed to obtain accurate figures.

Please let me know if you would like to schedule a consult and we’ll find a time that works for you.

Regards

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 778.433.1314. 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.