Roth IRA: Moving To Canada with your Roth IRA
Written by Carson Hamill CIM®, CRPC®, Associate Financial Advisor and Assistant Branch Manager & Dean Moro BComm, CIM®, Associate Financial Advisor
If you have a Roth IRA and you are planning to move to Canada, or you have already arrived, you may be wondering what to do with your Roth IRA. In this blog post we will provide you with some valuable information so you can make an informed decision.Topics covered in this article:
What is the difference between an IRA and a Roth IRA?
With a Roth IRA, you can make after-tax contributions, have your money grow tax-free, and generally take withdrawals after age 59½, that if qualified, are tax and penalty free. With a Traditional IRA, you can make contributions with either pre- or post-tax money. Your money grows tax-deferred, and after age 59½, withdrawals are subject to income tax.
How to Manage Your Roth IRA in Canada
First, rest assured that when you move to Canada, you do not have to liquidate your Roth IRA. Due to regulatory requirements, your US brokerage company may not be able to administer your IRA when you move across the border. And while Roth IRA and non-US resident IRA limits are being enforced more strictly, solutions exist for Roth IRA and Traditional IRA account holders residing in Canada. Solutions exist where you can work with a dual licensed Canadian financial advisor which will allow you to maintain the IRA and not incur a taxable liability. Speak to a Snowbirds Wealth Management advisor to learn more.
Treaty Election Filing Requirements
If you make a Roth IRA contribution as a resident of Canada, there could be significant tax repercussions, and you risk losing the tax-free growth for Canadian tax purposes. Additionally, to maintain tax-free status, you must submit a one-time treaty election by the filing deadline, which is April 30th of the year after your arrival in Canada. In other words, you risk a significant tax liability if you do not submit the proper paperwork by that deadline.
Keeping up with the essential documentation will be made easier if you engage with a qualified cross-border accountant and a dual licensed financial advisor with experience in the cross-border space.
When to File a One-Time Treaty Election
You must submit a one-time Treaty Election for each Roth IRA account if you want your Roth IRA to be excluded from US and Canadian tax. The filing deadline is April 30th of the year following your arrival in Canada. This is the same deadline as the filing date for your first Canadian personal tax return.
Is it advisable to convert your 401(k) to a Roth IRA?
Both a 401(k) and an IRA have advantages and drawbacks. The benefits of a 401(k) include creditor protection and inexpensive administration costs. Plan withdrawals can be eligible for specific penalty exemptions, such as those for first-time home purchases or qualified higher education costs.
An IRA, on the other hand, has its own advantages. It typically offers a wider range of investing possibilities, and you can pool your money within an IRA, combining multiple IRA rollover accounts. You also have more flexible distribution possibilities available with an IRA
When converting a 401(k) to a Roth IRA, there are some significant tax implications. The money you transfer to a Roth IRA will be subject to tax in the year you make the transfer. As such, you may consider converting your 401(k) to a Roth IRA if you anticipate a future increase in your tax rates.
You will typically have to roll over your 401(k) to an IRA, and then the IRA will thereafter be converted to a Roth IRA. Before rolling over a 401(k) to an IRA, typically you will need to have left your employment.
Do Canadians pay taxes on Roth IRAs?
Roth IRAs may not be subject to Canadian taxation if the right procedures are followed. Keep in mind that you must abide by US regulations. One restriction is that in order to avoid penalties and US federal taxation, you may need to have held the Roth account for a certain period of time and be older than 59.5 years of age.
When you move to Canada, there are two important rules regarding Roth IRAs:
- By April 30th of the year after your admission as a resident, you must submit a one-time Treaty Election. This has to be done for every Roth IRA account you own.
- Your Roth IRA cannot accept any contributions from Canada.
If you abide by these guidelines, your Roth IRA may not be subject to Canadian taxation. In the event you do not file this election, the income accrued in the Roth IRA will need to be declared on your personal tax return and included in your taxable income.
As always, you should discuss your circumstances with a qualified cross-border tax professional.
Roth IRA Minimum Distributions
There is no lifetime required minimum distributions if you are the Roth IRA owner. However, there are compulsory distributions if the Roth IRA is inherited. With some exceptions, non-spouse beneficiaries who inherit a Roth IRA must accept distributions and close the account within 10 years.
US-Canada Tax Treaty Impact
Assuming a valid Treaty Election has been made, the US-Canada tax treaty regards Roth IRAs held by Canadians or Canadian Residents as a pension. Once you become a resident of Canada it is generally advisable to make no further contributions to the Roth IRA.
Can you make contributions while living in Canada?
Contributions to a Roth IRA while a resident of Canada are not advisable and doing so may result in Canadian taxes becoming payable on your Roth IRA. Before you consider a contribution, consult with a cross-border tax professional.
What is the Canadian equivalent of a Roth IRA?
A TFSA is the Canadian version of a Roth IRA. Although there are some differences between the plans, there are many similarities. A Roth IRA and a TFSA are both funded using after-tax money, and provided the regulations are followed, the growth and income realized in the plans can be tax-free. Neither plan provides an end date for contributions or a necessary minimum distribution.
The contribution guidelines are the primary difference between a TFSA and a Roth IRA. As a resident of Canada, you are allowed to contribute up to a certain annual amount to a TFSA ($6000 for 2023). This contribution room is not based on income and may be carried forward. You are free to make withdrawals whenever you want and are not subject to taxes or penalties when doing so.Only earned income can be contributed to a Roth individual retirement account (Roth IRA). Most people can contribute up to $6000 to a Roth IRA in 2022 ($6500 in 2023). If you are ago 50 or older, the limit is $7000 ($7500 in 2023) using $1000 in catch-up contributions. There are also contribution limits based on your household income and filing status. If your earned income is over a certain level you cannot contribute at all.
Who can do a Roth IRA Conversion?
Anyone who has an IRA can convert it to a Roth IRA. There are no restrictions on eligibility based on age, income, or employment status. People frequently convert their IRAs to Roth accounts to protect themselves from potential tax rate increases. One example would be when moving to Canada, where personal tax rates are higher. In this scenario, it could make sense to convert your IRA to a Roth IRA to provide insurance against future higher personal tax rates.
Keep in mind that you will be bound by your conversion if you choose to convert your Roth IRA. Therefore, you cannot return to an IRA if the tax obligation is larger than you anticipated or if you change your mind. You must include the money that is converted from an IRA to a Roth IRA in your income and declare it on your personal tax return.
What to do before doing a Roth IRA conversion
A Roth IRA conversion does have potential income tax ramifications, which was already discussed. The funds you convert are taxed as ordinary income, and this additional income may place you in a higher federal income tax bracket. This can affect you in several ways. For example, the IRS can tax your Social Security payments based on the earnings reported on your income tax return, so having a greater income can reduce those benefits. A tax on capital gains is another factor to consider. You can avoid paying capital gains taxes if your income is low enough, which is sometimes quite advantageous for seniors and those living on a fixed income.
Managing Your Roth IRA with a Dual Licensed Canadian Financial Advisor
The biggest advantage of working with a dual licensed financial advisor (licensed in both Canada and the US) is that you may be able to maintain your US retirement accounts in the US and have them managed by your Canadian advisor. Working with the right brokerage firm and advisor could mean you won't be pressured to convert or collapse the accounts, which could be against your best interests. This can help you avoid a potentially large tax liability.
A dual licensed financial advisor is also aware of the investments a US citizen living in Canada can invest in and the investment structures they should avoid. Certain investments are regarded as PFICs (Passive Foreign Investment Companies) by the IRS and it is recommended these be avoided. Investing in PFICs can lead to significant accounting charges and IRS penalties.
A qualified cross-border financial advisor is knowledgeable about retirement planning and the pension systems in both Canada and the US. They will assist you in avoiding the frequent and expensive hazards of moving assets and retirement accounts across borders.
A Roth IRA can be an excellent way to save money for your retirement. Similar to a traditional IRA, this type of retirement account allows your investments to grow tax-free. It also lets you take tax-free withdrawals of your contributions (but not earnings) at any time.
If you move to Canada, there are certain things you need to be aware of to maintain the tax-free status of the account. Speak to a qualified dual licensed financial advisor to learn more and discuss your options.
If you’re planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email us at Snowbirds Wealth Management as we specialize in cross-border financial planning and wealth management. We work closely with experienced cross-border lawyers and accountants to ensure you have a team behind you.
About Snowbirds Wealth Management
Gerry Scott is a portfolio manager and founder of Snowbirds Wealth Management, an advisory firm focussed on the cross-border market. Together with Dean Moro & Carson Hamill, associate financial advisors with Snowbirds Wealth Management, they provide investment solutions for Americans living in Canada, and Canadians residing in the United States. Licensed in both Canada and the US, they provide tailored investment solutions to minimize the tax burden when moving assets across borders. To schedule an introductory call, CLICK HERE.
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