So you’re tired of living with short summers and are thinking of moving to the U.S. Or perhaps you are U.S. citizen who worked in Canada for a number of years and are returning. In either case, you may be wondering if you should leave your RRSP in Canada or take it with you.
Before you make a decision, it’s important to plan appropriately before you leave Canada.
How The U.S. Looks At RRSP’s & RRIF’s
The IRS considers an RRSP or RRIF (hereafter I simply refer to both accounts as RRSP’s) as a regular non-registered investment account. As a result, all of the investment income in the RRSP is fully taxable for U.S. purposes. However, when a person takes up residency in the U.S., they should file form 8891 with their 1040 tax return to claim a tax-treaty exemption on the investment income.
When a US resident withdraws from an RRSP, only the income portion is taxable and the individual is permitted to withdraw their original contributions (the total of all RRSP contributions made to the RRSP) free from U.S. income tax.
Can I Roll My RRSP Over To A U.S. IRA?
There are no provisions in the U.S. that allow a rollover of RRSP to an equivalent Individual Retirement Account (IRA).
If you want to take the RRSP with you to the U.S. you would have to collapse your RRSP and the full value would be included in your income in the year of the withdrawal. This could result in a substantial tax hit.
What Should I Do With My RRSPs When I Move?
1. Avoid withdrawing the funds from your RRSP before you leave Canada.
Instead, leave the RRSP in Canada where the investments can grow free of Canadian tax. When you become a resident of the U.S. for tax purposes, any withdrawals from the RRSP will be taxed under non-resident rules and will be subject to the 25% withholding tax. If you decide take periodic payments, either by converting to a RRIF or purchasing a registered annuity, the withholding tax would be reduced to 15%.
Once you are a resident of the U.S. any withdrawals from your RRSP will be subject to U.S. taxes. However, in the U.S., you are permitted to withdraw the cost base of your RRSPs tax-free. The cost base is determined to be the original cost base on the date you became a resident of the U.S.
It is important to note that you engage the services of a cross-border tax professional to help you give up your Canadian residency properly to ensure you are not subject to full Canadian taxes on your withdrawals.