At Cardinal Point, one of the most frequent inquiries we
receive is from prospective clients asking what they should do with their U.S.
retirement accounts after a moveto Canada.These individuals are often caught
off-guard by their U.S.-based financial advisor or institution after learning
that their investment accounts must go into restricted status or be permanently
closed. The reason they are often given is that their U.S.-based advisors and
related custodian can no longer maintain accounts registered toa Canadian
address.
Many advisors and/or firms in the U.S. – even some of the
largest - are not properly registered
and licensed to provide investment advice for a client living in Canada (even
if the client is a U.S. citizen). In fact, there are few U.S.-based firms that
carry the proper licenses and registrations to be able to servicetaxable, IRA
or 401(k) accounts held by Canadian residents. these Canadian residents holding
IRAs/401ks. And because of the additional rules and compliance requirements associated
with servicing a client physically living outside of the United States, many
U.S.-based firms have policies against providing services to non-U.S.
residents.
we receive inquiries all the time from prospective clients
asking us what they should do with their U.S. retirement accounts now that they
have moved to Canada. Many of those calls that we receive are from panic
stricken individuals that have been told by their U.S.-based financial advisor
or institution that their account is being restricted or closed out because
they now have a Canadian address on file.
The reason these institutions communicate this bad news is typically for
one of two reasons. The first reason is
that the advisor and/or firm is not properly registered and licensed to provide
investment advice for a client living in Canada. In fact, there are very few U.S.-based firms
that carry the proper licenses and registrations to be able to service these
Canadian residents holding IRAs/401ks. The second reason may be that the
U.S.-based firm has a policy in place that they will not service non-residents
of the U.S. because they do not want to comply with all of the additional rules
and compliance requirements associated with servicing a client physically
living outside of the U.S.
The situation becomes is equally troubling when you an
individual looks to a Canadian financial advisor to help. Yes, these advisorsy
carry the proper Canadian securities licenses and they can manage
accountsdomiciled in Canada. But because they are not registered in the United
States, Canadian advisors cannot but
they are not registered in the U.S. to oversee a U.S.-based retirement account.
The situation leaves the Canadian resident frustrated and with few options for what
to do with their U.S.-based retirement account..They can only oversee
investment accounts domiciled in Canada. So, they cannot help either.
Unfortunately, some advisors have tried to find workarounds
that are not only illegal but not in the best interest of the client. Over the
years, prospective clients have shared with usthe “advice”that they have
received from both U.S. and Canadian advisors. In the United States, these
suggestions include leaving an old U.S. address on file or using a friend’s or
family’s U.S. home address.To the advisor’s compliance officer and firm, it
makes it appear as if the client is still residing in the United States. Not only is this illegal under U.S.
securities laws and very likely against company policy guidelines, it could
also suggest to the U.S. state in which the account is held, that the client is
still a tax resident of that state.
Given some of the fiscal challenges facing many U.S. states, we have
seen state tax authorities use this as phishing expedition to generate or
pursue more tax revenue.In Canada, frequently given advice includes selling out
the U.S. retirement account and moving the proceeds to Canada, so that the
Canadian-based advisor can manage the assets. Simply following this advice
without fully understanding or determining the tax impact of such a move, can
be costly and harmful.
and all too often we hear proposed suggestions from Canadian
and U.S. advisors that put their interests ahead of the clients. In the U.S. we
have heard “Just leave your old U.S. address on file, so that I can continue to
manage your account” or “Do you have a friend or family member in the U.S. we
can register the account to” Both suggestions are illegal. In Canada, we hear equally if not more
disturbing suggestions. “Just sell out
all of your U.S. retirement account and move the proceeds to Canada and then I
can manage the assets for you”. The tax implications of such a move can be
devastating.
So what options are there for Canadian residents with U.S.
retirement assets? While it may seem like a no-win situation, there are options
available. The first step is to find a qualified Canada-U.S. cross-border
advisor that is registered and licensed to provide investment and financial
planning advice in both countries. Although there are very few who meet
theserequirements, these cross-border advisors cannot only legally manage your
investment and retirement accounts in both countries but can also provide the
accompanying financial, tax and estate planning services that are required for
those individuals with investment assets and interests in both Canada and the
U.S.To take it a step further, when choosing a cross-border financial advisor,
make sure that they are bound by thefiduciary standard and not the less strict
suitability standard used by most Canada/U.S. investment and bank owned
firms.The fiduciary standard is the highest standard of care in the investment
industry. As a fiduciary, the advisor must operate in a way that puts the
client’s needs ahead of his or her own through a transparent and conflict-free
service model.
Because there is no one-size-fits-all approach when it comes
to addressing Canada-U.S. cross-border financial planning matters, aSo, what
should someone do if they find themselves in this position and are there
advisors out there that can help? The
first step is to find a qualified Canada-U.S. cross-border advisor that is
registered and licensed to provide investment and financial planning advice in
both countries. Although there are very few cross-border advisors in existence,
those that are can manage your investment accounts in both Canada and the U.S.
To take it a step further, when choosing a cross-border financial advisor, make
sure they are bound by the fiduciary standard and not the less strict
suitability standard. As a fiduciary, the advisor must operate in a transparent
and conflict-free fashion where they must legally put your interests ahead of
their own. The fiduciary standard is
also the highest standard of care in the investment industry.
When working with a fiduciary-bound, cross-border advisorr,
they will take the time to properly understand your complete and unique
situation. The advisor will then and develop a comprehensive Canada/U.S.
financial plan including options on how
best to address your U.S.-based retirement accounts.It is important to note
that there is no “onesizefitsall” when addressing Canada-U.S. cross-border
financial planning matters. In the case of a Canadian resident holding a U.S.
retirement account, some of the factors that must be considered include but are
not limited to the following: age of the client, likelihood of the client
returning to live in the U.S. one day, size of the IRA/401k account, type of
IRA (tTraditional vs. RothOTH), client tax situation, citizenship, U.S. estate
tax exposure, future income needs and residency of beneficiary.
Once a thorough assessment of the client’s situation is
completed, the advisor will likely recommend one of the following courses of
actions if the individual holds holding a tTraditional or rRollover IRA* (For
the purpose of this short article, we are not listing the pros and cons of each
scenario listed):
1) Close out
the IRA and withdraw the funds: Under this scenario, if the owner of the
account is a Canadian citizen, there would be a 30% U.S. withholding tax applied
to the withdrawal. (This taxit can be reduced to 15% if there is a signed IRS
W-8BEN form on file. It is important to note that we are finding an increasing
number of U.S. although we are increasingly finding some U.S.institutionsthat
do notare not honor or understand the role ofinga W-8BEN form.). Depending on the client’s tax situation, the
account owner may be able to recoup some, if not all, of the withholding tax
applied through the use of foreign tax credits. If you arethe individual is a
U.S. citizen, there is no mandatory withholding tax applied. If the plan owner
is under the age of 59 ½, an additional 10% “early withdrawal” penalty will be
assessed on the value of the distribution. The entire amount withdrawn from the
IRA account would then be picked up as income for Canadian income tax purposes
for Canadian tax residents. If you are a U.S. citizen, the amount would be
picked up as income for Canadian and U.S tax purposes. Through the application
of foreign tax credits, this form of double taxation could be eliminated. It is
important to be very careful when considering redeeming the entire IRA/401k
account because the tax treatment tends to not be beneficial in most client
situations. Note, that although foreign
tax credits could be utilized to minimize or eliminate income or withholding
tax, this would not be the case for any penalties imposed on distributions
before age 59 ½
2) Close out
the IRA and move the proceeds to an RRSP:If you are not a U.S. citizen or tax
resident, under the right circumstances this might be a worthwhile option to
consider. Under U.S. tax laws, transfers for an RRSP or RRIF cannot be made
into a U.S. IRA. However, Canadian tax
law does provide for the transfer of proceeds from a U.S. retirement account to
an RRSP. Under Canadian tax rules, there
are two provisions under the Income Tax Act that with proper planning, the
transfer of IRA or 401(k) proceeds can be made to any existing or new RRSP
without compromising one’s RRSP contribution room. That being said, although Canadian tax on the
U.S. retirement account distribution can be reduced or eliminated, the U.S.
treaty withholding tax of 15% - and the 10% penalty if it applies – cannot be
eliminated or reduced. Therefore, if the
Canadian wanted to contribute the gross amount from the U.S. retirement asset
to a Canadian RRSP, they would have to provide the 15% amount themselves from
other financial resources. o?
3) Leave the
IRA account in the U.S.: For many account owners, this course of action makes
the most sense given that the Canada-U.S. Tax Treaty allows a Canadian resident
with an IRA to leave their account in the U.S. and receive the same
tax-deferred treatment the individualthey would enjoyif still living within the
United States.had they continued to reside in the U.S. Under this scenario, the
plan owner could let the account grow until they arehe or she is required to
take out their annual Minimum Required Distributions (RMDs) after the year they
turnturning 70½. At that time, a 30% withholding tax would be applied to each
annual distribution received by a Canadian citizen (reduced to 15% with a
W-8BEN on file). For a U.S. citizen, no withholding requirements are necessary.
The plan holder could continue to receive their RMD each subsequent year the
same way the individual receivesy would receive their annual Canadian RRIF
minimum withdrawals.
Any withdrawals or distributions would be picked up as
income for Canadian tax purposes (for Canadian residents) if you are a Canadian
citizen and orwould be picked up as income for Canadian and U.S. tax purposes
(for U.S. citizens or tax residents). if you are a U.S. citizen. Again, foreign tax credits could be applied
to eliminate this double taxation for U.S. citizens. There are Aadditional
benefits to holding the account in the United States. These.S. include
continued currency diversification (USDs), and less expensive investment
options, as well as more and more variety of investment options, than can of
investment options than can be found in Canada.
* For the purpose of this short article, we are not listing
the pros and cons of each scenario identified.
Many of the same tax rules outlined above for an IRA account
would also apply to a 401(k) account holder who is a resident of Canada.
However, we would suggest that the account owner consider “rolling over” their
401(k) account to an IRA account. The key benefit to completing this tax-free
rollover is that an IRA account typically allows for more investment options
within the plan
canada us tax planning.
If you arean individual is an owner of a Roth IRA account,
your the options are far greater and easier
are far more flexible and easy to navigate. This is because given that any withdrawal received from a
Roth IRA after the account owner turns age 59½ is considered tax free for Canadian
and U.S. tax purposes. No withholding taxes are applied either. Like the
Ttraditional IRA, the account can grow tax deferred indefinitely for Canadian
and U.S. tax purposes. Further, there is no RMD for Roths, meaning the account
holder can take out as little or as much as they the individual wants once
turningwant once they turn 59½ years old.
For someone that has worked hard and accumulated savings
within their U.S. retirement account, aA thoughtful plan must be put in place
after aonce you move to Canada. Afterall, many of us work hard our entire lives
to save for retirement and a cross-border move shouldn’t jeopardize a person’s
long-term financial health. When choosing an advisor, take the time to find a
Make sure you choose to work with a qualified advisor individual or firm that
is licensed to provide investment advice in both Canada and the United States.
In addition, the advisor must.S.,has a bring a firm understanding of
cross-border financial and tax planning matters and, just as importantly, the
and has the appropriate Canada-U.S. investment platform to support the whatever
recommended course of action is in your best interest.
Cardinal Point is aAt Cardinal Point, we are a
Canada-U.S. cross-border advisor firm with offices in Canada and the U.S.
Wethat specialize in assisting individuals and families with their investment,
tax, financial and estate planning needs. We have the unique ability to manage
U.S. retirement accounts, under the fiduciary standard, on behalf of Canadian
residents and operate solely under the fiduciary standard. If you wish to
discuss the options for your U.S.-based retirement accounts, please feel free
to reach out to us. One of our as a cross-border advisors would be happy to
assist you.
