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Moving across international lines is complicated in a whole variety of ways. You have to handle passports, visas, work permits, dual citizenship, and a whole manner of other issues. But, one thing you need to be prepared for is dealing with retirement accounts split between two different countries.
If you’ve spent time living or working in Canada, chances are you have a Registered Retirement Savings Plan (RRSP) account. However, now that you’re in the United States, you may want to merge it with your Individual Retirement Account (IRA).
This article will help you learn about the challenges of rolling money from a Canada RRSP account into an American IRA account, and what you can do to manage them.
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What Is an RRSP?
An RRSP is a Registered Retirement Savings Plan. It is a retirement savings plan used in Canada and shares a lot of similarities with a United States Individual Retirement Account (IRA). You can contribute a certain percentage of your income to an RRSP, up to a certain capped amount.
Like with a traditional IRA, you can get a deduction on your taxes for the amount you contribute to an RRSP if you meet certain conditions. That money grows tax-free as the years go by, and you don’t have to pay taxes until you withdraw the money. These accounts use investment portfolios to grow your money.
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What Is an IRA?
An IRA, or Individual Retirement Account, is a U.S. retirement savings option. Like RRSP accounts, IRA accounts gain their increases through investment profiles.
You can deposit up to $6,000 per year in an IRA as of 2019, as long as you meet the income requirements. Once you reach the age of 50 or older, you can deposit an additional $1,000 per year. This is called a catch-up contribution. However, you can exceed this limit if you complete a direct rollover from 401K accounts and other employer-sponsored plans.
There are two types of IRA: the traditional IRA and the Roth IRA. With a traditional IRA, you defer paying taxes on the money in your retirement account until you withdraw it. With a Roth IRA, you pay taxes in the bracket you’re in when you put the money in the account, saving you from having to pay those taxes in a higher tax bracket later on in life.
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What Tax Challenges Will I Face by Rolling Over an RRSP into an IRA?
The problem with moving your money from a Canadian RRSP account to an American IRA account is the taxes you will face.
With various U.S. retirement accounts (such as a 401K), you can initiate a direct transfer from one account to the other. You never touch the money during this process, so it doesn’t count as income for the year and you don’t have to pay taxes on it.
But because an RRSP is in a different country, you can’t set up a direct deposit to transfer that money to a United States account. This means that when you withdraw the money from your RRSP, you will have to pay taxes on it as you would if you were withdrawing it under normal circumstances.
The trick is you’ll have to make a separate contribution to your IRA in the United States. You’ll also have to pay taxes on that money again when you withdraw it from your traditional IRA in retirement. Essentially, current laws do not allow you to maintain the tax-deferred status between the two countries.
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What are My Options?
There are only three options when it comes to rolling over your RRSP into an IRA. You’ll need to weigh your options and decide which one is best for you. Be sure to consider the tax consequences along with your retirement plans and where you want to live in the future.
Leave It There
One option for your RRSP money if you want to avoid the double taxation is to just leave the money with the RRSP account custodian. You should stop contributing to it though, not only so you don’t lose any more money, but also to avoid having to report taxes in two countries. Let the money sit and continue to grow until you reach retirement age.
Once you hit retirement, convert your RRSP into a Registered Retirement Income Fund. This account allows your money to keep growing but sets up an IRA Required Minimum Distribution.
At tax time every year, you’ll have to report income from two countries. Due to the complex nature of multiple retirement incomes and paying taxes in both countries, you’ll want to make sure that you do your research and reach out to a qualified tax accountant.
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Take the Hit
Another option is to take the hit and pay taxes both times. If you are only just getting started with your RRSP account and you only have a few thousand dollars in there, the amount you pay in taxes won’t be heinous. You will also have to pay tax on the money again in the future, but it might be worth it. Consolidating accounts can make managing your finances a much easier task.
If you think you’re coming back to the U.S. for good, it may also be worth it to pay the taxes now and cut your losses with Canada. The amount you lose will increase every year you wait, and chances are you’ll lose more money paying tax accountants to deal with your two different incomes than you will just paying the taxes now. In addition, it will save you from the chance that tax laws will change in either country and catch you off guard.
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If you decide to leave your RRSP money in Canada, you do have the option to leave it as an RRSP and withdraw funds the normal way you would if you were living in Canada. If you’re of retirement age, a special election may allow you to get a significant break on the taxes you pay on that income as a non-resident.
This special election is meant to benefit those non-residents who have a significant amount of money saved in an RRSP account. It will allow you to withdraw money from your RRSP account at a significantly lower tax rate than you would receive if you were a resident of Canada. You will still have to pay taxes in two countries every year, but it is a viable workaround.
Learn More About Canada RRSP
Managing retirement accounts across international lines is not an easy task. You’re either looking at incredibly complex taxes for the rest of your life or paying taxes twice on the same money. What you do with your Canada RRSP depends on your situation and preference; what will make your life easier and benefit your retirement plans in the long run?