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If you’ve worked in the United States but now live in Canada, you might not know what to do with your U.S. Individual Retirement Account, or IRA.
An IRA can be good for funding retirement but it can also be difficult to manage as a Canadian resident.
The benefits of moving an IRA to Canada
Canadian advisers with limited cross-border experience might suggest you transfer the IRA to your Registered Retirement Savings Plan. Canadian tax laws allow this but just because you can do it, should you?
First off, you should only consider this option if you are 59.5 years or older. Before that age, the U.S. charges an early withdrawal tax of 10 per cent that does not qualify as a foreign tax credit in Canada.
Simplifying your finances is a big draw. If you are retiring in Canada, dealing with two different systems for withdrawals can be a lot of work. Many U.S. custodians – the regulated financial institution that oversees your U.S. retirement account – won’t make direct deposits into foreign bank accounts and instead will mail cheques or charge to wire money to Canada. Not having to deal with this is a benefit.
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Many U.S. custodians will also freeze accounts for non-residents. That means your account gets little to no attention and you can only sell your investments. This might be fine if you are already retired with a well-diversified portfolio, but it can be trouble if the IRA account no longer matches your risk tolerance. In this case, transferring to your RRSP makes sense.
A relatively small IRA balance can also be a nuisance. Once you turn 73, you are required to withdraw a minimum amount every year – similar to the way the withdrawal process for a Registered Retirement Income Fund works in Canada. You may not want to deal with smaller amounts and the administrative headaches involved.
From an income tax perspective, once you reach 65, withdrawals from your RRIF – the successor to your RRSP – are eligible to be split with your spouse under Canadian pension income splitting rules. This is an often-overlooked benefit that can provide meaningful income tax savings for Canadians, since withdrawals from your IRA cannot be split with your spouse.
There are, however, also real positives to keeping your IRA account.
The benefits of keeping an IRA in the U.S.
If you plan to return to the U.S. in retirement or spend time there as a snowbird, using your IRA to pay for your U.S. expenses can protect you from currency conversion volatility.
If you have a large IRA account with more than $500,000, transferring it to Canada involves a lumpsum withdrawal that is subject to a 15-per-cent withholding tax. That withholding tax will create a foreign tax credit that can be used against taxes owing in Canada – but only to the limit of your Canadian tax amount.
If you withdraw the full amount of your IRA expecting to move it into your RRSP or RRIF, but don’t have Canadian taxes at least equal to the 15 per cent withholding, then you will be unable to use all of your foreign tax credit. You cannot carry this forward to use against taxes in future years in Canada so you’ve lost some portion of your wealth to tax leakage.
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To get around this, you could split your IRA transfer over multiple years, withdrawing small lump sums designed to match the U.S. withholding tax as close as possible to your expected Canadian income tax.
This is a more complex option that requires more tracking. It can be considered a periodic payment by the Canada Revenue Agency, nullifying your ability to transfer the amount into your RRSP.
The last benefit of keeping your IRA is for estate planning. Unlike with your RRSP or RRIF, if you name beneficiaries for your IRA that aren’t your spouse, they can receive your IRA and use the inherited IRA provision to stretch out withdrawals over a 10-year period.
This helps your estate avoid probate tax and income tax on the full value of the IRA. When you name a non-spouse as a beneficiary for your RRSP or RRIF, you only avoid probate tax in Canada.
There is no right or wrong answer when considering moving your U.S. retirement account to Canada, but making the transfer without understanding the full impact can be a costly mistake.
Sam Rook is a certified financial planner with Bird’s Eye Wealth in Toronto.
