Options for U.S. IRA account holders when living in Canada

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.