Cross-Border Question of the Week: Moving from the U.S. to Canada — Does a Backdoor Roth IRA Trigger a 10% Penalty If You're Under Age 59½?

Written by Carson Hamill CIM®, CRPC®, FCSI® Associate Portfolio Manager and Assistant Branch Manager & Dean Moro BComm, CIM®, CRPC®, Associate Portfolio Manager

Question: Does a Backdoor Roth IRA conversion trigger a 10% penalty if you are underage 59½?

Short Answer: No. The 10% early withdrawal penalty does not apply to Roth conversions—even if you're under 59½.Normally, taking money out of a retirement account before age 59½ results in a 10% IRS penalty. But Roth conversions—the key step in the Backdoor Roth IRA strategy—are specifically exempt. According to IRS rules, conversions and rollovers are not subject to the early withdrawal penalty.

• Example 1: Withdrawing From a Traditional IRA Before Age 59½
• Example 2: Performing a Backdoor Roth IRA Conversion When Under the Age 59½
• Why the Backdoor Roth IRA Conversion Make Sense Before a Move to Canada
• Understanding the Backdoor Roth IRA Strategy
• Myth Busted: Will I Be Penalized If I’m Under 59½?
• Essential Cross-Border Planning before Moving to Canada

Example 1: Withdrawing From a Traditional IRA Before Age 59½

Consider John, age 50, living in the United States. In 2025, he decides to withdraw $20,000 from his traditional IRA. Here's how that plays out from a tax perspective:

• The entire $20,000 is treated as ordinary income, since it came from pre-tax contributions.
• Assuming John is in the 22% federal tax bracket, he owes $4,400 in federal income tax.
• Because he is under 59½, he also incurs a 10% early withdrawal penalty, or $2,000.
• Total federal tax liability: $6,400.
• If John lives in a state that taxes retirement income, additional state tax may apply.

Example 2: Performing a Backdoor Roth IRA Conversion When Under the Age 59½

Now consider Sarah, age 45, who earns too much to contribute directly to a Roth IRA. In 2025, she contributes $7,000 in after-tax dollars to a Traditional IRA and then converts it to a Roth IRA.Because this is a conversion (not a withdrawal) Sarah does not pay the 10% early withdrawal penalty, even though she is under 59½.If the original $7,000 contribution was non-deductible and there were no earnings before the conversion in any of her traditional IRA accounts, she owes no additional income tax either. The result is a penalty-free, and potentially tax-free, Roth IRA with all future qualified withdrawals treated as tax-free under U.S. rules.

Access the official IRS source by CLICKING HERE

Why the Backdoor Roth IRA Conversion Make Sense Before a Move to Canada

For high-income U.S. individuals considering a move to Canada, the Backdoor Roth IRA can be a strategic win. Converting to a Roth before becoming a Canadian tax resident allows you to pay U.S. tax at potentially lower rates, and lock in tax-free growth and withdrawals under U.S. law.More importantly, Roth IRA accounts opened and funded before you move to Canada may retain their tax-free treatment on the Canadian side—provided you meet certain filing requirements.

Understanding the Backdoor Roth IRA Strategy

This strategy is a legal workaround for high income earners who are ineligible to contribute directly to a Roth IRA due to income limits. The process involves:

1. Contributing after-tax dollars to a Traditional IRA
2. Converting those funds to a Roth IRA, prior to your move
3. Paying any applicable tax on earnings or deductible contributions at the time of conversion

Once converted, the funds grow tax-free and can be withdrawn tax-free in retirement if IRS rules are met.

Myth Busted: Will I Be Penalized If I’m Under 59½?

No, Roth conversions are not subject to the 10% early withdrawal penalty, regardless of age. However, if you later withdraw investment earnings before both the five-year holding period ends, and age 59½, you could face taxes and penalties on those earnings.

Essential Cross-Border Planning before Moving to Canada

1. Convert Before MovingComplete your Roth conversion while you are still a U.S. tax resident. Canada generally respects the tax-free treatment of Roth IRAs only if the account was opened and funded before you become a Canadian resident.

2. File the CRA Tax-Treaty ElectionThis one-time election under the Canada-U.S. Tax Treaty allows you to defer Canadian taxation on the income and growth within your Roth IRA. The deadline to file is April 30th of the year following your move to Canada. For example, if you move in 2025, the deadline is April 30, 2026. You must include details such as the account number, trustee or custodian name and address, and the plan establishment date.

3. Avoid Additional ContributionsAfter becoming a Canadian tax resident, DO NOT make new contributions or conversions to your Roth IRA. Doing so can result in the entire account becoming taxable in Canada moving forward.

Final Thoughts

The Backdoor Roth IRA can be a powerful, tax-efficient strategy for Americans planning a move to Canada - if it is timed and executed correctly.

Navigating the tax rules between the U.S. and Canada is complex, and missteps can be costly. That’s why it’s essential to work with a qualified cross-border advisor. They can help you determine the optimal timing for your Roth conversion.

Next Steps

If you are planning on moving to Canada and need assistance with your investments, estate planning, and portfolio management, please call or email our team 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 an integrated team in your corner.

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 and 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, please click here.

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