IRA to Canada: the four most common options
If you have an IRA and you’re moving to Canada, you may be wondering if and how you can bring it with you, and what tax or penalty would be involved. Here are the four most common routes.
Option 1: Collapse the IRA and move the money to Canada
This option is relatively easy but very tax inefficient. Depending on how large the IRA is, you’ll incur a fair amount of tax on the withdrawal: up to 30% withholding tax, and if you’re under 59½ an additional 10% penalty.
Option 2: Roll the IRA into a Roth IRA
This is available only while you’re living in the U.S. and needs to be reviewed by a CPA to make sure it makes sense for you. Once you arrive in Canada you can maintain the Roth, but you cannot make any more contributions once you become a Canadian tax resident. Consult a CPA if you consider this route, since you also need to file an election under the Canada–U.S. tax treaty to defer paying Canadian income tax on income accrued in a Roth IRA.
Option 3: Transfer the IRA funds to an RRSP
There are a few moving parts. You need two things before considering this: first, the IRA must be from funds you contributed yourself, not from an employer; second, you need enough Canadian income for this to make sense.
- You collapse your IRA and pay the tax to the IRS. Withholding tax can range up to 30%. If you’re under 59½ you also pay a 10% penalty.
- You contribute the remaining after-tax funds to your RRSP in the same calendar year or within 60 days after the end of that year.
- You include the IRA distribution on your Canadian tax return with an offsetting deduction for the RRSP contribution.
- Have your CPA work with you on this. The contribution is claimed as a transfer under paragraph 60(j) of the Income Tax Act, so it does not need or use RRSP contribution room, but the U.S. tax you paid can be difficult to recover as a foreign tax credit. This route tends to work only for people with large Canadian incomes to offset the taxes.
Option 4: Keep the IRA and move it to a firm that can serve Canadian residents
A firm registered in both countries can hold the IRA while you live in Canada, keeping its tax-deferred status and avoiding any withdrawal, withholding or penalty. The assets are transferred in kind, and the firm handles the compliance and tax reporting. This is the only one of the four routes that moves the account without a tax event, which is why it is the usual choice. The trade-offs are that few firms offer it, they charge advisory fees, and you should confirm the firm’s registration in your province before you transfer.
Sources and further reading
- IRS, Rollovers of retirement plan and IRA distributions
- IRS Topic 557, Additional tax on early distributions (the 10% tax before age 59½)
- IRS Publication 515, Withholding of Tax on Nonresident Aliens
- IRS, Roth IRAs
- CRA Income Tax Folio S5-F3-C1, Taxation of a Roth IRA
- CRA, Certain lump-sum payments from a foreign retirement arrangement (transfers to an RRSP under paragraph 60(j))
Related resources
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Chris is a cross-border financial advisor licensed in both Canada and the United States. He helps Americans moving to Canada and Canadians moving to the U.S. keep their retirement accounts intact and build one plan that covers both sides of the border. He writes for Cross Border Wealth in his personal capacity.
Disclosure: Chris writes in his personal capacity; his views do not represent any firm he is associated with. Cross Border Wealth does not provide advisory services. If you need advice, use the Get connected form and we will introduce you to a licensed professional.