TRANSFERRING YOUR IRA TO AN RRSP – CAN BE A TERRIBLE MISTAKE!

We often hear from prospective cross-border clients that they have been advised to transfer their Individual Retirement Account (IRA) to a Registered Retirement Savings Plan (RRSP). This misguided advice is often given by advisors who do not have the capability to manage an IRA.

In contrast, the Steele Wealth Management team is uniquely positioned to overcome the limitations that other wealth managers face when servicing cross-border clients. We are different because we integrate Canadian and American wealth through our association with Raymond James (USA) Ltd. (RJLU). RJLU is a Canadian-based, US-registered investment firm offering integrated cross-border wealth management solutions to Americans living in Canada and to Canadians living in the US. As RJLU advisors, we are licensed and regulated in both Canada and the US.

IN SUMMARY:

1. Transferring your IRA to an RRSP is not necessarily in your best interest.
2. You may keep and maintain your IRA when you become a Steele Wealth Management client.
3. There is no need to collapse your IRA. There is no need to transfer your IRA to an RRSP.

CONSEQUENCES OF TRANSFERRING YOUR IRA TO AN RRSP

When the IRA is transferred to an RRSP it is considered a lump-sum withdrawal according to US tax rules and a punitive US tax will be withheld. This withholding is 30% for non-US persons and 10% for US persons. After this withholding, only the net value of the IRA is available to transfer to the RRSP. Basically, you lose up to 30% of your IRA on transfer. As well there is an early withdrawal tax if you are under the age of 59.5 which is 15% for non-US persons and 10% for US persons.

Under Canadian tax rules, the IRA is considered a foreign retirement arrangement. The IRA can be transferred to an RRSP on a tax-deferred basis. The total value of the IRA is included in taxable income and an RRSP deduction is then available. However after the US withholding tax, there is only a portion of the value of the IRA available to deposit into the RRSP. This means that there will be an increase in your taxable income which may impact income-based tax credits (basic personal tax credit and age tax credit) and may impact Old Age Security clawback amounts. You can mitigate this impact if you transfer the full pre-tax value of your IRA but it will be necessary for you to come up with the additional funds (equal to the withholding tax) to fully offset the income inclusion on your Canadian tax return.

On death, the entire value of the RRSP is fully taxable unless a qualifying beneficiary (a spouse or financially dependent child or grandchild) is named. If a spouse is named as beneficiary the investments in the RRSP can be transferred directly to the spouse’s RRSP.

BENEFITS OF KEEPING YOUR IRA WITH STEELE WEALTH MANAGEMENT

You can maintain your IRA with Steele Wealth Management. The benefit is that the IRA continues to reside in the US. Therefore it will be covered under the Canada-US Tax Treaty which allows a Canadian resident to continue to hold an IRA and receive the same tax treatment that would be available if still living in the US.

The benefits are:

1. Tax Deferral
• Your IRA continues to grow tax sheltered.
• Your IRA is only subject to tax when withdrawals are made for both Canadian and US tax purposes. For example when you are mandated to take out annual Required Minimum Distributions (RMDs). For more information, please see our article “Mind Your RMDs”
• RMDs are considered periodic payments which have a low US tax withholding rate of 15% for non-US persons and 10% for US persons.
• There is no requirement for you to file a US tax return if you are not a US citizen (non-resident alien) because the 15% US withholding tax is the final liability to the US.
• RMDs for IRAs are lower than minimum RRIF withdrawals. Therefore maintaining your IRA (rather than transferring to an RRSP) may result in a smaller amount of mandatory taxable income each year with less applicable Canadian tax. These additional funds can remain in your IRA for further tax deferral.
2. Currency Advantages
   • Your IRA investments can remain dominated in US dollars. This avoids costly conversion fees and unfavorable foreign exchange rates if you primarily invest in US securities and keep both the holdings and investment earnings in USD currency.
3. Estate Planning with Your Spouse
   • On death your spouse can inherit your IRA even if they live in Canada.
   • Having your spouse inherit your IRA is a tax-free rollover for both Canadian and US tax purposes.
   • Your spouse has flexibility to roll the IRA investments into an IRA in their name and draw the IRA minimum withdrawals over their lifetime, extending the tax-advantaged growth.
   • Your spouse can have peace of mind knowing that they may continue with Steele Wealth Management as their financial advisors efficiently and responsibly maintaining their IRA.
4. Estate Planning with Adult Children
   • On death you can name your adult children as beneficiaries to inherit your IRA even if they live in Canada.
   • Inheriting an IRA is a tax-free rollover for both Canadian and US tax purposes. This means that the value of your IRA account is not taxable in Canada on your final return, unlike the value of an RRSP or RRIF which is taxable on death of the last surviving spouse.
   • IRA investments can continue to grow following your death. Your designated beneficiaries inherit and maintain a tax-deferred investment account, unlike Canadian RRSPs and RRIFs, which lose their tax-deferred status upon the death of the last surviving spouse.
   • Your adult children can withdraw the Inherited IRA over a period of up to ten years. If you die before RMDs started, then the IRA beneficiaries have the flexibility to plan strategic withdrawals in low-income years to minimize their income tax or they could let the account grow for the maximum period until it is time withdraw the entire amount in the tenth year.
   • Having the ability to spread the inclusion of the IRA into your beneficiary’s taxable income over 10 years provides the flexibility to lower the effective tax rate. In comparison, the entire value of your RRSP or RRIF is included in your final tax return in one entire, significant amount.
   • Your beneficiaries can feel secure knowing that they may continue with Steele Wealth Management as their dependable financial advisors to maintain their Inherited IRA.

CONTACT US FOR HELP

The Steele Wealth Management team of professionals will help you understand the tax and financial planning consequences of dealing with your IRA. We can help you avoid making a terrible mistake. We will create a managed investment strategy, comprehensive retirement plan and estate plan to integrate your entire portfolio of US and Canadian investments.