Options for US Qualified Accounts for Canadian Residents

Advantages:

+ Growth is tax-deferred in Canada and the U.S.

+ Employer plans typically offer low-cost mutual fund investment options.

+ Your plan remains in U.S. currency.

+ The retirement distributions from an employer plan are generally considered eligible pension income for Canadian pension splitting and the pension credit ($2,000 pension amount)

+ The plan may be eligible for penalty-free early withdrawals if separated from employment at or after age 55.

+ The required minimum distributions are delayed longer if still working for the plan employer past the required beginning date (RBD).

+ Dividend distributions from an employer or employee stock ownership plan (ESOP) are free from early withdrawal penalties.

+ The value of the plan is not included in expatriation income if holder is a covered expatriate for expatriate tax calculation (however, does not benefit from treaty rates on distributions).

+ Typically, unlimited protection from creditors and legal judgements under U.S. federal law.

Disadvantages:

- Account holders may not have the option to keep the account open at their current carrier. (Employer plan custodian may force account holder to transfer or liquidate and close account if they are no longer living in the U.S.)

- If permitted to remain open, certain custodians do not permit trades, changes to investment choices, or additions of new investments for residents living outside the U.S., even for U.S. citizens living in Canada.

- Employer plans only provide a small menu of investment funds instead of a breadth market-traded investment.

- No access to Canadian securities or Canadian currency holdings in a U.S. employer plan.

- Assets are not consolidated with one financial advisor who can consider overall asset allocations and investment objectives.

- Often left in “set it and forget it” mode, which may not be an ideal strategy to help reach retirement goals.

- The employer plan provider likely provides no investment advice or retirement planning services in the context of Canadian tax residency.

- Limitations may exist for designating non-spouse beneficiaries.

- Automatic cash-out provisions may apply for small balances.

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.

Advantages

+ Investments continue to grow tax-deferred for both Canadian and U.S. tax purposes if the transfer is executed properly in consultation with their tax professional and their former employer.

+ Holdings can remain in U.S. currency if desired.

+ Ability to hold Canadian currency and other foreign currencies.

+ Expanded investment options in market-traded securities with access to Canadian and other foreign securities.

+ Flexibility to withdraw as much or as little from the IRA before the Required withdrawal/distribution date (like a RRIF).

+ Consolidation of various U.S. plans into one account and simplification of required minimum distribution (RMD) calculations.

+ Assets can be consolidated with one financial advisor who can consider overall asset allocations and investment objectives.

+ A Financial advisor can provide investment advice and retirement planning services in the context of Canadian tax residency.

+ Potentially lower fees depending on investment choices and portfolio management.

+ Early penalty-free withdrawals available for first-time home purchases ($10,000 lifetime limit).

+ Effective January 1, 2020, the age limit for traditional IRA contributions was eliminated. Individuals must still have compensation income to contribute.

+ Flexibility to name any person, group, or entity as beneficiary (subject to custodian review).

+ No automatic cash-out rules.

Disadvantages:

- Loss of net unrealized appreciation (NUA) capital gains treatment on employer stock if a U.S. taxpayer rolls employer stock into an IRA. Growth becomes ordinary income for U.S. tax purposes. Consider withdrawing stock before moving to Canada.

- If subject to expatriation tax as a covered expatriate, the IRA value is includable in expatriation income as a specified tax deferred account.

- Retirement distributions from an IRA are not eligible pension income for Canadian pension splitting and the pension credit.

- No option to withdraw lump sums before the age of 59½ without penalty if separated from employment at or after age 55.

- Potentially higher fees depending on investment choices and portfolio management.

- An IRA rollover completed in the same year as a back door Roth IRA conversion will increase the taxable income of the Roth conversion because the calculation measures the IRA value at the end of the year.

REMINDER - Attributes applicable to both 401(k) plans and IRAs

• Generally, withdrawals before age 59½ are subject to a 10% penalty tax in addition to regular U.S. income tax. Exceptions are available: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions.
• Required minimum distributions for both IRAs and employer plans must begin at age 73 for individuals born after December 31, 1950, unless the employee is still working past 73 for the U.S. employer providing the plan.
• Survivor spouse beneficiaries can inherit the account and continue to defer tax on the account growth over their remaining life expectancy until withdrawn.
• Children and other non-spouse designated beneficiaries can inherit and continue tax-deferred growth of the account for up to 10 more years after the account holder’s death, even if they live in Canada. Check with 401(k) plan provider if there are limitations on non-spouse beneficiaries.
• Upon death, the account value is not included in the deceased’s Canadian terminal income tax return (unlike RRIF or RRSP). The beneficiary pays taxes on the withdrawals.
• Generally, no special Canadian tax election forms required to let account grow tax deferred.
• The ability to convert to a Roth IRA remains intact if the accountholder decides to move back to the U.S.
• Generally, the account is protected from creditors and bankruptcy claims.
• 15% non-resident withholding tax applies to periodic payments and 30% applies to lump sum distributions (collapse entire account) for non-U.S. persons living in Canada.
• S. retirement plans are U.S. situs assets exposed to U.S. estate tax if the deceased taxpayer’s net worth is high enough to generate a U.S. estate tax liability in the year of death.
• When a plan holder dies with a home address outside the US or has an estate administrator outside the US, the financial institution may require clearance from the IRS (transfer certificate) before releasing the inherited account to the beneficiary. The executor may have to file estate disclosures or an estate tax return to obtain the transfer certificate from the IRS if the plan value exceeds $60,000.

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.

Advantages

+ Immediate access to cash in U.S. dollars, perhaps at a favorable exchange rate to the Canadian dollar.

+ Assets are no longer situated in the U.S.

+ Opens more investment options than offered by an employer plan.

+ No trading restrictions when liquidated capital moved to a Canadian institution.

+ Simplification of not holding extra accounts outside Canada + Required minimum distributions are not required at age 73 (formerly age 72 and 70.5).

+ Taking a distribution of employer shares may lower U.S. taxes for a U.S. taxpayer through net unrealized appreciation (NUA) if completed before establishing Canadian tax residency.

+ Avoid US transfer certificate requirements imposed by US financial institution at death.

Disadvantages

- Gross value is a fully taxable income inclusion for Canadian tax purposes to a Canadian taxpayer.

- Gross value is a fully taxable income inclusion for U.S. tax purposes to a U.S. taxpayer.

- U.S. withholding tax will apply at a rate of 30% on a lump sum withdrawal instead of 15% for a non-U.S. person taking periodic withdrawals.

- In addition to income tax, a 10% early withdrawal penalty tax applies if withdrawn before age 59½ as a lump sum.

- Recognition of income will likely push taxpayer in a higher tax bracket depending on total value of the account and current year income.

- Investment capital is no longer growing on a tax-deferred basis.

- Loss of a U.S. currency denominated tax-deferred investment account.

- Loss of access to low-cost U.S. mutual funds.

- Loss of creditor and bankruptcy protection for account assets.

- Assets subject to probate if reinvested by the taxpayer in their legal name.

- The tax benefit of stretching the income inclusions over the spouse beneficiary’s lifetime is lost.

- The tax benefit of stretching the income inclusions for the non-spouse beneficiary(s) over 10 years past death is lost.

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.

Advantages

+ Assets are no longer situated in the U.S.

+ Access to all Canadian and U.S. exchange-traded securities and other Canadian products.

+ Probate can be avoided on an RRSP or RRIF if account holder designates beneficiaries.

+ Survivor/successor annuitant spouse can inherit the account and continue to maximize tax-

deferred growth over their life expectancy.

+ Consolidation of tax-deferred retirement accounts.

+ Avoid US transfer certificate requirements imposed by US financial institution at death.

NOTE:

A transfer to an RRSP is generally NOT in the best interest of the client from an income tax perspective.

It is not possible to make a 60(j) transfer when the taxpayer is over age 71.

Contact debbie.wong@raymondjames.ca to compute the tax consequences of a 60(j) transfer to an RRSP.

Disadvantages

- Taxable income inclusion in Canada for the gross value of the qualified plan.

- Taxpayer must fund the U.S. withholding tax out of pocket to top up the RRSP contribution to

fully offset the Canadian income inclusion.

- May not be able to recover U.S. 30% withholding tax plus 10% penalty tax (non-U.S. person) if the taxpayer does not earn high-bracket taxable income in Canada.

- RRSP and RRIF withdrawals subject to double taxation if not all U.S. withholding tax was originally recovered through Canadian tax return.

- Taxable income inclusion for U.S. person and are then subject to double taxation because withdrawals are taxable in Canada on the same capital.

- The RRSP or RRIF total value is fully taxable on the terminal tax return of the last surviving spouse upon death.

- Loss of the 10-year stretch deferral when a non-spouse inherits the funds.

- May not be able to maintain U.S. currency holdings or, if able, additional fees may be involved, plus currency spreads may be charged.

- No option to convert back to an IRA if returning to the U.S. for retirement (withdrawals subject to flat rate Canadian non-resident withholding tax).

- No option to convert to a Roth IRA if returning to the U.S. (Note: DO NOT convert any plans to Roth IRA while living in Canada).

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.