Americans living in Canada: U.S. retirement accounts and the “orphaned” client
Most U.S. broker-dealers are not registered to do business in Canada, so Canadian residents with an IRA, Roth or 401(k) are often asked to leave within 30 to 90 days. Here is what that means and the way out.
Many Canadian residents have found themselves in the unfortunate situation of being “orphaned” by their existing U.S.-based advisors, as most U.S. broker-dealer and investment advisory firms are not properly registered to do business in Canada. This presents an obvious problem for Canadian residents who hold U.S. retirement accounts like an IRA, Roth IRA or 401(k).
What being “orphaned” means
In most circumstances, the U.S.-based advisory firm asks the Canadian resident to leave and find a new home for their investments. The secondary problem is that most Canadian-based financial advisors are not licensed, and do not have the correct regulatory registrations, to accept these U.S.-based retirement accounts.
U.S.-based financial institutions give somewhere between 30 and 90 days to find a new home. If you can’t find a new home or advisor to transfer these accounts to, you will be forced to liquidate. You do not want to be forced into this, as it creates a taxable event of up to 30% withholding tax and, if you’re under 59½, an additional 10% penalty.
The way out
A small number of advisory firms are registered in both the U.S. and Canada and can accept and manage a U.S. retirement account for a Canadian resident. Transferring the account to one of them in kind avoids the forced distribution, the withholding tax and the penalty, and keeps the account tax deferred. Expect advisory fees, and check that the firm is registered in your province. Some people instead consolidate into a firm that offers self-directed accounts for Canadian residents; that avoids fees but leaves you making the investment decisions yourself.
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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.