I am moving to Canada from the USA. What should I do with my Traditional IRA?

For new Canadian residents, Traditional IRAs can be tricky. But don’t panic! Just plan ahead. Some of the answers to your questions will depend on whether or not you are a US Citizen. We’ll point that out as we go along.

Let us help you with 5 steps you will need to take to ensure a smooth transition to Canada with your Traditional IRA in tow.

Step 1: Don’t close your Traditional IRA.

Great news! You can keep your Traditional IRA open in the United States while you are living in Canada. But you can’t move your Traditional IRA to a Canadian financial institution (See step 4 on transferring your IRA into an RRSP).

Though you can keep your Traditional IRA in the US, you may find that many US financial firms will no longer allow you to hold your Traditional IRA with them once you’re a resident of Canada (especially if you are a Canadian citizen… US citizens may have an easier time with this). That’s where a dual-licensed, cross-border financial advisor comes in. At Huston Wealth Management, we can hold your US retirement accounts AND your Canadian retirement accounts, allowing you to maintain your Traditional IRA while living in Canada (See Step 3).

So, don’t rush out and make a potentially huge tax mistake by fully withdrawing your Traditional IRA.

Step 2: Consider ceasing contributions to your Traditional IRA after you have moved to Canada.

Once you move to Canada, the earnings in your Traditional IRA are still tax deferred from both a Canadian and US tax perspective (until you make a withdrawal) (Source: Internal RJLU article: Canadians with US Employer Plans). However, any contributions may not be tax-deductible in Canada, therefore you may wish to consider whether there is a benefit of continuing to make contributions when there may not be a corresponding deduction in Canada.

So, what should you do? Move to step 3.

Step 3: Discuss your options with a dual-licensed USA-Canada cross-border financial advisor.

Most of the time, a US investment firm can only service US residents and a Canadian firm can only service Canadian residents. That is because the firm and/or their financial advisors are not registered to trade securities and offer investment advice in both countries.

But a cross-border financial advisor, like Huston Wealth Management, can offer financial advice, hold your accounts, and place trades on both sides of the border. So, before you make a move, let us help you with your financial planning and get in touch with our tax professionals at Raymond James USA.

Step 4: Don’t be too quick to roll your Traditional IRA into a Canadian RRSP.

After you move to Canada, you will be able to open a retirement account that is very similar to your US Traditional IRA. It is called a Registered Retirement Savings Plan (or RRSP for short) and operates in a very similar fashion.

While you do have the option of an indirect transfer from your US Traditional IRA into your Canadian RRSP, known as a 60(j) transfer, but this may not be the best move, for several reasons:

1. Mandatory Tax Withholding: Be very careful here, especially if you’re not a US Citizen or Green card holder. When you withdraw your funds from your Traditional IRA, your US firm may require that 15-30% of your withdrawal be withheld for income taxes (generally 15-20% for US Citizens and Green Card Holders and 30% for Canadian Citizens – Source: https://www.irs.gov/retirement-plans/plan-distributions-to-foreign-persons-require-withholding#:~:text=More%20In%20Retirement%20Plans&text=Does%20your%20U.S.%20retirement%20plan,IRC%20Section%201441(a)).). For US citizens and Green Card Holders, the final tax is calculated on your federal tax return, and may be higher than the withholdings, depending on your level of income and filing status. Additionally, if you are under age 59 ½, the US will require you to pay a 10% early withdrawal penalty (though this amount will not be required to be withheld at the time of withdrawal). There may be a way to recoup this withholding by claiming a foreign tax credit on your Canadian tax return. However, if you don’t have enough Canadian income, then you may be stuck owing taxes on your transfer (Source: Article XXIV, ‘Elimination of Double Taxation’ in the US/Canada Tax Treaty: https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997-2007.html).
2. Exchange Rate and Fees: When you move your money from US dollars to Canadian dollars, you will be subject to the foreign exchange rate at the time of transfer. This rate could cause a significant drop or gain in the dollar value of your investment. Furthermore, the firm processing the exchange rate will charge a fee (sometimes called a spread) on the amount transferred. Though this won’t be a significant amount, it will reduce your total savings.
3. Permanency of the move: Two things here: 1) You generally must move the full amount of your Traditional IRA for a transfer to an RRSP (lump sum) and, 2) You can’t move it back. Once you move your IRA to an RRSP, you will not be able to roll it back from your RRSP to an IRA in the future (source: https://www.advisor.ca/tax/tax-news/how-to-bring-401ks-and-iras-to-canada/). If taxes were withheld from the IRA withdrawal and the gross pre-tax IRA withdrawal has to be contributed to the RRSP, that means that the amount withheld for taxes has to be personally funded from other sources, such as your savings.

Step 5: Be aware of the tax treatment of Traditional IRA distributions.

When you make a withdrawal from your Traditional IRA, the US and Canada will expect you to claim the full amount of the withdrawal as “income.” But don’t worry about being double taxed, just make sure you have a cross-border tax professional who specializes in dual tax filers. Though you do need to claim these amounts as “income,” you may claim a foreign tax credit against your Canadian tax liability, thus reducing your Canadian tax to the extent of your US tax liability. If your Canadian tax rate is equal or less than the US tax rate on the withholding, you should not owe additional Canadian tax.

*What if I’ve already moved to Canada and started a distribution or rollover?

Call us today and we can speak with one of your tax professionals. We will review all of your options. But don’t wait to call. We would love to help!

Have more questions?

Reach out to us and we would be happy to help you start planning for your move up north!

Disclosure: The information above is from sources believed to be reliable, however, we cannot represent that it is accurate or complete and it should not be considered personal tax advice. We are not tax advisors and clients must seek independent advice from a competent professional advisor on tax-related matters before withdrawing from their U.S. retirement plan.

Disclosure: This material has been prepared by Dean Huston and expresses the opinions of the authors and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This newsletter is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member-Canadian Investor Protection Fund.

Raymond James (USA) Ltd. advisors may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Raymond James (USA) Ltd. is a member of FINRA/SIPC