US & Canadian taxes on an IRA withdrawal - 401 to ira to rrsp -


QUESTION:

Hi!

I am a US citizen, under 59 1/2 years of age, and I have been a Canadian Permanent Resident (BC) for the past year.  I need to make an early withdrawal of approximately $50,000 from an IRA account and I am trying to understand what the tax arrangement is going to be.  I have not worked, nor deposited any money into this account, in the past 5 years.

I know that I will owe a 10% penalty to the US for early withdrawal, but how will this money be treated by Canada?  Even though I earned the money and contributed to the account many years before coming to Canada, did I make a huge mistake by not withdrawing this money before I became a Permanent Resident?

How will I have to report this on my Canadian tax return?  And will I be able to take a credit on my US return for any Canadian taxes I need to pay?  Or will I have to pay double?

Thanks in advance for your help.

Sincerely,

-------------------------------------------------------------------------------------------------------------
david ingram replies:
 
Well this is what we do and this is the only question being answered today.  If you need help looking after it next year, you know where we are.
 
You are involved in one of the big anomalies.
 
In a reverse situation, the US has a form 8891 which means that when you cash a Canadian RRSP in when a resident of the US or a US citizen in Canada, you would only pay tax on the earnings because the principal amount put into the RRSP was not deductible on your US 1040 or 1040NR.
 
Canada does not have such a vehicle and whatever you cash in is taxable on both your US 1040 (which you have to continue to file every year as a US citizen) and your Canadian T1 tax return.
 
You will pay the tax and 10% penalty to the US first.
 
Then you will put the amount on your Candian tax return but you will not pay double tax although you will likley pay more tax than if you just had the moey in one country.
 
You willpay the 10% pemalty unless you took the moey out to buy a Canadian house.  If you take the money out to buy a house, $10,000 is NOT subject tot he 10% penalty for early withdrawal,  The rest, however is subject to whatever your US marginal tax rate works out to be,.
 
When you report the money on your Canadian return, you  can claim a foreign tax creit by filling in Federal form T2209 and provincial form T2036.
 
Again, depending upon your marginal rate, you might pay a little more to Canada.
 
---------------------------------------------
This older question might help as well
 
davidingram@shaw.ca: Please see bottom of message if you wish to unsubscribe.
------------------------------------------


QUESTION:

HI

I am a Canadian Citizen and have been working in the US for a few years, during my employment there I have contributed regularly to the 401k.  I have recently moved back to Canada and is wondering:

1)how do I withdraw the 401k with minimum tax penalty
2)how do I transfer this amount to a Canadian RRSP, and do I get taxed when I bring in this 401k money into Canadian soil?
3)if I don't rollover the 401k into Cdn RRSP, and take out the money as cash, do I have to declare this on my Canadian Tax Return?
4)also I haven't filed Canadian Tax return for all the years that I have been in the US, do I have to file previous years Canadian Tex return, before filing for the current taxation year?
5)I also have a property in US, if by any chance I declare bankruptcy in the US, does the creditor have any right to claim my Canadian assets/ cash?
thank you so much for your time,
I look forward to hearing from you,
KY

---------------------------------------------------------------------
david ingram replies:

1.   withdrawing the money will result in US tax PLUS a 10% penalty for early withdrawal if you are less than 59 1/2 years old. To withdraw the money, you will usually roll it into an IRA first.

2.    You have to roll it into an IRA.  then you cash in the IRA and pay the tax plus the 10% penalty for early withdrawal - then you roll the gross amount into a Canadian RRSP - (you usually have to borrow the money to make up the difference for the tax paid to the IRS) - then you get to claim a foreign tax credit in Canada for the amount of tax you paid to the US.  This only works if you roll it over in a high tax year as a rule.

3.    Yes - just as you have to report it in 2 above.

4.    Unless you had income from Canada or a very close connection which continued through your time in the US, there is / was no need to file a Canadian return while you were gone.

5.    The US creditor has the right to collect from you in Canada or Yugoslavia.  It is relatively easy for them to chase you to Canada although it does not happen often for small amounts.  It does for $10,000 and up..
-----------------------------------------------------------------


David,
 
My husband and I moved back to Canada after working in the US on TN visas for the last 8 years. WE moved back in Feb 2007.  He left behind a 401k with 50K in it. I left behind a 401K with 5K and a simple IRA with 8K in it.  The company that was managing my Simple IRA has just sent me a letter stating that they no longer are able to manage it because they are not licenced to provide financial services in Canada. I am not sure what I should do.  Ideally we would like to keep our 401K there because we many end up moving back there one day. can I roll the simple IRA into my 401K even though I am no longer a resident?
I appreciate any help you can offer. 
Is there a station that we can listen to your program here in Toronto?

-------------------------------------------------
david ingram replies:
 
You can listen to the Sunday morning Show on the Internet at www.600am.com Sunday fr4om 9 to 10:30 Vancouver time which is noon to 1:30 PM Toronto time.
 
Darrell Thompson at Blackmont Securities in Toronto is capable of looking after your US IRA but the amount of $8,000 is not enough to bother with.  You can NOT roll an IRA into a 401(K) but you can roll a 401(K) into an IRA..
 
Assuming that you have an earned income in Canada, I suggest that you cash it in, pay the US tax and penalty and roll it over into a Canadian RRSP OR just pay the tax and take the balance and pay down your Canadian mortgage.
 
These older questions might help
 
QUESTION:

Hello,
    I was on H1 in US for 6 years before moving to Canada as a permanent resident in April 2007. I have a 401k account from my old company whom I left a couple of months ago. I also have a Roth IRA and a brokerage account. I would like to close all these accounts and use these as a downpayment for my house. Trying to get to 20% downpayment to avoid CMHC fee. When should I withdraw(this year or next year) and what would be the best way to avoid/minimize any withholdings? I have a Canadian mailing address. Initially I was thinking of doing all this next year to avoid paying any taxes this year, but if the financial institutions are going to withhold taxes because I am a non-resident, it will make matters worse. Thanks

----------------------------------------------------------------
david ingram replies:

Withholding tax is not the problem.  The withholding tax is only that, a withholding tax.  The actual withdrawals will be taxable at the end of the year on your tax return and will usually have a further tax liability.

Taking the money out of your 401(K) before you are 59 1/2 for instance, generates an additional 10% penalty.  However, if you are taking it out to buy a house, up to $10,000 is penalty free.

Off the top of my head, I would say you are better off to roll the 401K into an IRA.  Then take the IRA out and roll some or all into a Canadian RRSP next year.

$20,000 can then be withdrawn under Canadian rules to buy a house.  It becomes taxable over 15 years or you can pay back one 1/15th a year over 15 years to avoid the tax but you are usually better off to pay down the mortgage and pay tax on the 1/15th.,

On next year's US income tax, the IRA would come out at the lowest US rate and although taxable in Canada would be a rollover deduction and then you would get a foreign tax credit on your Canadian return for the foreign tax paid to the US.  That would leave you with a 10% penalty on the excess over $10,000 US but no or very little of actual tax paid at this time.  You would, of course, have a tax to pay when you withdrew it from your Canadian RRSP in the future.

It may also be that you would just be better off paying the tax and using the excess as a down payment.  If having $5,000 more cash (at a tax bill of $3,000) saves you $5,000 in CMHC fees, it is worth it.

Sit down and do a spread sheet.

This older question may help as well.
---------------------------------------------------------------
 
Hi,

I have recently moved back to Canada from the US and I have a couple
questions about rolling a 401(k) into an RRSP (I know in general
this is not the best financial practice, but it looks like this
would be the best way for me to get access to the funds to use as
a down payment on a property).

1.  I know it's possible to roll and IRA into an RRSP.  Is it
    possible to do so with a 401(k).  From everybody I have talked to
    so far I am getting mixed signals as to whether this is possible,
    or I have to roll the 401(k) into an IRA first.

2.  What documentation, if any, do I need to show that I am rolling
    the 401(k), or the IRA, into an RRSP, so that it simply does
    not look like a contribution.

Thanks!
------------------------------------------------------------------------------------------------------------
david ingram replies:

I am including a prior reply as an answer.

------------------------------------------------------------------------------------

Dear Sir,
Question

I have been working in California for the 5 years on H1 visa  and have 401 plan(about 40K)
What should I do with this plan , when I will move to Canada ( I'm a PR.)
Move it to IRA or other option .
Thank you very much

_____________________________________________________________________________________

david ingram replies:
------------------------------------------



QUESTION: Hello,

In the US since 2001 and there is a 50-50 chance I will move back to Canada
in 2007 or beginning of 2008. What should I do with the following:

1.401K : I have a 50K+. Should I let it grow? Rollover in a IRA? should I
withdraw when I know for sure that I will move back? (I heard you can
rollover an IRA or 401K into a RRSP) what are the tax implications?

2. In the event I move to Canada, can I use my 401k or IRA toward the
purchase of my first home and not be taxed on my withdrawal.(I currently
rent in the US and never bought a property in Canada) Will the US recognize
a property bought in Canada as eligible for the first time home buyer
program?

3. We wanted to contribute to a Coverdell education saving account this year
for our first child. Will Canada tax me upon distribution?

4. Is there a best time to move back to Canada, (late 2007 or beginning of
2008)

Thank you for your time
----------------------------------------------------
david ingram replies:

Your 401(K) can be rolled to an IRA.  Your IRA can then be rolled into an
RRSP but the US will not recognize it as a rollover and want to penalize you
10% for early withdrawal if you have not yet reached the exalted age of 59
1/2 at the time of withdrawal.

By buying a house, you can exempt up to $10,000 of the withdrawal from the
10% penalty.

Rolling it into the RRSP involves reporting the IRA as income on your
Canadian return and then claiming the deduction for the rollover. Because
the tax paid to the is a foreign tax credit in Canada, you get to claim the
tax paid to the USA against other income in Canada.

Therefore, it is necessary to have significant other income in Canada for
you to get the equivalent of a tax free rollover.  In other words, do NOT
move to Canada at the end of a year.  You should move at the start of a
year, i.e. Jan 15 to May 15 or so that you can get a lower tax rate on your
IRA withdrawal in the USA and maximum benefit for the foreign tax credit in
Canada.

The alternate if you do move at the end of a year is to wait until the next year to do the rollover.  

Done properly, and with the RRSP money in the account long enough in Canada,
you can then withdraw up to $20,000 Canadian (tax deferred) to use as a down
payment on your Canadian house.

------
the following previous email talks about it as well.


QUESTION:

worked in CA for 4 yrs. returned to BC in Apr.'04.  Need to transfer my
retirement fund but having difficulties with bank and credit union.  US
specifies that I must roll it over to IRA accounts (Individual retirement
account.  I do not want to be subject to the 20% withholding fee for IRS.
What would be the best way to get the funds to me here in Canada.
======================================
david ingram replies:

1.  move it to an IRA and leave it there in one of the world's strongest
economies.  Most financial advisors are trying to get "more" of their
clients' money into US funds.

2.    If you just have to have it in Canada, you have to cash it in in the
US and pay your tax to the US.  take what is left, add the amount (even if
borrowed) of the tax you paid to the US and buy your Canadian RRSP.  That
will give you a tax deduction which should be larger than the tax you paid
to the US.

When you get the refund, pay back the loan.  You will have transferred the
money quite handily.

The amount you took out is also taxable on your Canadian return.  Pay that
tax with the tax you paid to the US as a foreign tax credit.

You will likely need help.

Don Walkow of Seabank Capital Management in Surrey, BC is one Canadian who
can help you with the process while you are still in the United States.  His
licensing allows him to deal with 401(K) plans, IRA's, RRSP's and straight
securities in any state in the US - He is one of two people I know of who
can do this. - His North American telephone number is 1-800-541-9952 and you
can find out more at www.seabankcapital.com.

Darrell Thompson of Blackmont Securities is the other person and is located
in Toronto.  His phone number is 866-775-7704

If you are in Canada and in BC in particular, Fred Snyder, host of "Its Your
Money" every Sunday Morning from 9:00 to 10:30 AM Vancouver Time can also
look after you but can NOT talk to you if you are in the US. (999 out of
1,000 other Representatives in Canada can NOT talk to you either).  You can
listen to this Canadian Program (I am a guest on the fourth Sunday of every
month) live at www.600am.com.

----------------------------------
Answers to this and other similar  questions can be obtained free on Air
every Sunday morning.

Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Dundee Wealth
Management and I will be hosting an INFOMERCIAL but LIVE talk show called
"ITS YOUR MONEY"

Those outside of the Lower Mainland will be able to listen on the Internet
at

www.600AM.com

Local phone calls to (604) 280-0600 - Long distance calls to 1-866-778-0600.

Old shows are archived at the site.

=---
And, as of August, 2008, there is also a 6 PM to 7 PM show on CKNW 980 on the AM dial in Vancouver every Sunday night as well.

call 604-280-9898 or 877-399-9898 or *9898 on your cell or listen on the Internet at www.cknw.com

--



SUGGESTED PRICE GUIDELINES - Aug 5, 2008
 
david ingram's US / Canada Services
US / Canada / Mexico tax, Immigration and working Visa Specialists
US / Canada Real Estate Specialists
My Home office is at:
4466 Prospect Road
North Vancouver,  BC, CANADA, V7N 3L7
Cell (604) 657-8451 -
(604) 980-0321 Fax (604) 980-0325

Calls welcomed from 10 AM to 9 PM 7 days a week  Vancouver (LA) time -  (please do not fax or phone outside of those hours as this is a home office) expert  US Canada Canadian American  Mexican Income Tax  service help.
pert  US Canada Canadian American  Mexican Income Tax  service and help.
David Ingram gives expert income tax service & immigration help to non-resident Americans & Canadians from New York to California to Mexico  family, estate, income trust trusts Cross border, dual citizen - out of country investments are all handled with competence & authority.
 
Phone consultations are $450 for 15 minutes to 50 minutes (professional hour). Please note that GST is added if product remains in Canada or is to be returned to Canada or a phone consultation is in Canada. ($472.50 with GST for in person or if you are on the telephone in Canada) expert  US Canada Canadian American  Mexican Income Tax  service and help.
This is not intended to be definitive but in general I am quoting $900 to $3,000 for a dual country tax return.

$900 would be one T4 slip one W2 slip one or two interest slips and you lived in one country only (but were filing both countries) - no self employment or rentals or capital gains - you did not move into or out of the country in this year.
 
$1,200 would be the same with one rental
 
$1,300 would be the same with one business no rental
 
$1,300 would be the minimum with a move in or out of the country. These are complicated because of the back and forth foreign tax credits. - The IRS says a foreign tax credit takes 1 hour and 53 minutes.
 
$1,600 would be the minimum with a rental or two in the country you do not live in or a rental and a business and foreign tax credits  no move in or out

$1,700 would be for two people with income from two countries

$3,000 would be all of the above and you moved in and out of the country.
 
This is just a guideline for US / Canadian returns
 
We will still prepare Canadian only (lives in Canada, no US connection period) with two or three slips and no capital gains, etc. for $200.00 up. However, if you have a stack of 1099, or T3 or T4A or T5 or K1 reporting forms, expect to pay an average of $10.00 each with up to $50.00 for a K1 or T5013 or T5008 or T101 --- Income trusts with amounts in box 42 are an even larger problem and will be more expensive. - i.e. 20 information slips will be at least $350.00
 
With a Rental for $400, two or three rentals for $550 to $700 (i.e. $150 per rental) First year Rental - plus $250.
 
A Business for $400 - Rental and business likely $550 to $700
 
And an American only (lives in the US with no Canadian income or filing period) with about the same things in the same range with a little bit more if there is a state return.
 
Moving in or out of the country or part year earnings in the US will ALWAYS be $900 and up.
 
TDF 90-22.1 forms are $50 for the first and $25.00 each after that when part of a tax return.
 
8891 forms are generally $50.00 to $100.00 each.
 
18 RRSPs would be $900.00 - (maybe amalgamate a couple)
 
Capital gains *sales)  are likely $50.00 for the first and $20.00 each after that.

Catch - up returns for the US where we use the Canadian return as a guide for seven years at a time will be from $150 to $600.00 per year depending upon numbers of bank accounts, RRSP's, existence of rental houses, self employment, etc. Note that these returns tend to be informational rather than taxable.  In fact, if there are children involved, we usually get refunds of $1,000 per child per year for 3 years.  We have done several catch-ups where the client has received as much as $6,000 back for an $1,800 bill and one recently with 6 children is resulting in over $12,000 refund. 

Email and Faxed information is convenient for the sender but very time consuming and hard to keep track of when they come in multiple files.  As of May 1, 2008, we will charge or be charging a surcharge for information that comes in more than two files.  It can take us a valuable hour or more  to try and put together the file when someone sends 10 emails or 15 attachments, etc. We had one return with over 50 faxes and emails for instance. 

This is a guideline not etched in stone.  If you do your own TDF-90 forms, it is to your advantage. However, if we put them in the first year, the computer carries them forward beautifully.

--
IRS Circular 230 Disclosure:  To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.--

-
Disclaimer:  This question has been answered without detailed information or consultation and is to be regarded only as general comment.   Nothing in this message is or should be construed as advice in any particular circumstances. No contract exists between the reader and the author and any and all non-contractual duties are expressly denied. All readers should obtain formal advice from a competent and appropriately qualified legal practitioner or tax specialist for expert help, assistance, preparation, or consultation  in connection with personal or business affairs such as at www.centa.com or www.garygauvin.com.  If you forward this message, this disclaimer must be included." -


 

Comments (0)


CEN-TA Cross Border Services - Tax, Visas, Immigration
http://www.centa.com/article.php/CanWeekofMon20081006000937.html