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.
Related Articles
- RRSPs And Retirement Allowances
- Moving An IRA or 401(k) to Canada
- RRSPs versus Non-Registered Accounts
- Early Withdrawal Of RRSP While A Resident Of The USA
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In your article you state that once you leave Canada and become a resident of the US , you are permitted to withdraw the cost base of your RRSP’S tax free
It is my understanding that the IRS (72(w) ) changed this in Oct 2004 so that generally payments from RRSP’S are fully included in US income except to the extent the contributions ,or earnings inside the plan, as the case may be’ were subject to tax in Canada ,US or another country
Your comments
Thank you
Robert Shortly
The IRS considers the RRSP a simple grantor trust and the IRS taxes the grantor or contributor on all income as it is earned or realized. The application of form 8891 provides treaty relief for the accumulated income and tax deferral.
In my opinion IRC s. 72(w) applies to employer-sponsored pensions and not RRSP’s.
I have a number of RRSP’s in Canada and am currently residing in the US with no intention of returning. Just to be clear, if I decide to withdraw the cost base of my RRSP to move to a US IRA, I can do this without any additional US taxes but would still be subject to the 25% withholding tax in Canada. Is this correct?
David,
The withdrawals from the RRSP would be subject to a 25% non-resident withholding tax on the amount withdrawn.
The withdrawals will also have US consequences. The US will look at the sum of all contributions made to the RRSP an that would be the “cost” and the excess would be taxable.
You should engage a cross-border planning form to assist you as these strategies can be complex.
In October 2004 IRS section 72(w) would negater the stepping up of the cost base strategy
Robert,
I came across some information recently that suggests that the IRS looks at the contributions to the plan since its inception as the cost basis of the plan. It suggested that the sum of contributions would be used as the cost basis but that opening a new RRSP account and transferring the existing assets to the new account before leaving Canada would affect a bump.
Your thoughts?
can you tell me the source of the information
In conversation with several US CPA’s -they were of two opinions
The one I mentioned previously re section 72(w) rules
and the one you mention -that being the original contributions would be non taxable (This is the way California taxes RRSP’S)
However none accepted that the step up strategy was viable
I am a Canadian citizen and a US Permanent Resident. I have several RRSP accounts that I left in Canada when I moved. I wish to consolidate my RRSPs into a single account and I probably need to adjust my investment mix as well. Naturally, I want to avoid triggering any tax liability at this time. Are US residents free to adjust investment options within an RRSP? Are there restrictions on the transfer of funds between RRSP accounts that would not apply if I were still a Canadian resident?
You should call a few Canadian financial institutions to ask if they can help. You may not be able to consolidate or readjust your investment mix due to securities laws.
You should sill be able to defer federal US tax as long as you file form 8891. Also be carefulynof state tax if our state has an income tax.
I am a US resident with RRSPs remaining in Canada. I have statements shwoing the “book value” of my RRSPs on my ‘departure date’ to the US. My understanding is that book value = cost basis. Market value is different. Will this be acceptable for US reporting assuming a conversion to US dollars?
Jim,
It would appear that the IRS considers the contributions to the RRSP as opposed to the securities bought. It might be best to work with a CPS on this as you might have to go back to each and contribution and convert it since the IRS does not permit yearly average FX.
As for suitable investments, Canadian or US stocks or bonds. Any other foreign investments may complicate matters.
What investments are best for earning foreign passive income to enable getting credits for foreign taxes paid on RRSP distributions?
This is an excellent question. Because of the different categories of foreign income defined by the IRS, the foreign tax credit can only be used as a credit against tax that would be incurred on foreign income of the same category.
So if you make an RRIF or RRSP withdrawal, Canada will withhold 15 or 25%, respectively. It is considered foreign passive income. To make use of the foreign tax credit, you need to have generated some foreign passive income to write it off against. CPP and OAS, I believe, would qualify. But if there are other ways to augment that foreign passive income, I would LOVE to hear about it!
Hi Tax Guy:
I’m a bit confused.
Here’s my situation:
On Jan. 5, 2009, I have an RRSP in Canada with a current value of $100,000 (i.e. this includes $90,000 contributions and $10,000 interest income).
On Jan. 6, 2009, I move to the U.S.
On Jan. 7, 2010 I’m still in the U.S.. I am now a permanent U.S. resident. My RRSP is still in Canada. Say, It is now worth $101,000.
If I withdraw all of the $101,000 on Jan. 8, 2010 (re: I’m still in the U.S. and I’m still a U.S. resident)..
How much do I have to include in income for U.S. purposes?
Does the Canadian Bank withhold 25% tax when I withdraw it and how do I get this tax amount back?
Thanks,
Dominic
My understanding is that the US allows you to withdraw the contributions from the RRSP without tax consequences and any in excess of that amount would be added to gross income.
The 25% withheld at source would be claimed as a foreign tax credit or itemized deduction on your US tax return.
Hi Tax Guy,
I am currently a Canadian permanent resident that may move back to the US. I am thinking of contributing to my RRSP for the tax break on that income and leaving it there until I retire. Is this a good move? Or am I better off not contributing anymore so I can take it to the US if I move?
Thanks
Keith,
I can be a little complicated from a US tax perspective. The IRS looks at the RRSP as a simple grantor trust and unless you file the appropriate exemptions (form 8891) you will have to pay the tax on the RRP income.
If you are in a state that has state tax, you will be required to pay the state tax on accumulated income on the RRSP and there is no treaty protection or exemptions.
If you are going to move to a state with no income tax, then you should be fine in terms of leaving it in Canada. Be aware that once you draw as a US resident that you will be allowed to draw out the accumulated contributions to the RRSP tax-free under US law. The withdrawals will still be subject to Canadian withholding tax and you can claim that as a tax credit or itemized deduction on the 1040.
After you leave you may not be able to make investment changes due to securities laws so it is advisable to ensure that you have the proper investment mix.
Finally, you should not hold mutual funds since these may cause additional reporting requirements in the US and can be rather cumbersome.
Thanks Tax Guy!
Just a follow up… if I do move and lose my Canadian residency, I suppose I will have no status anymore (I won’t be a citizen or anything of Canada). But is my RRSP savings still valid – you don’t need to have some status in Canada to maintain that RRSP, correct?
Keith
Hello Keith,
When you cease to be a resident you are considered to have sold your worldwide assets at fair market value. This triggers a tax event. However, registered accounts are excluded from this deemed disposition.
A bit of round about way to say yes you can leave the RRSP here. You might be restricted from placing trades in RRSPs while you are not resident in Canada due to securities laws. Check with your brokerage firm.
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