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Moving Your RRSP/RRIF
The most popular question we field is "how should I move
my RRSP/RRIF to the US?" In a lump-sum? In stages? Using the minimum
withdrawal amount? Unfortunately, the answer to these questions
requires considerable thought and a thorough understanding of your
unique financial situation to see what opportunities or obstacles
exist. There simply is no general answer for all.
One myth to dispel is that of moving a Canadian RRSP to a US IRA
(Individual Retirement Account). The current rules and regulations
simply do not allow a Canadian RRSP to be rolled over to an IRA
while maintaining the tax-deferred status in both countries. Your
only alternative is to collapse the RRSP and transfer the cash to
the US and then make an IRA contribution or leave your RRSP in Canada
. Of course, you need to be aware of the tax implications before
doing so as you can end up being double-taxed. The other thing to
consider is when you have developed a prudent withdrawal strategy,
what is done with the money? The answer depends, again, on your
individual financial situation and what your overall goals and objectives
are.
Some people decide just to leave their RRSPs in Canada and forget
about them. Before doing so, you need to consider the following:
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Currently, your maximum tax rate on your RRSPs is cut almost
in half to only 25% compared to withdrawing it if you lived
in Canada . Under current rules, solid foreign tax credit
planning can reduce the effective withholding rate on your
RRSP withdrawal to less than 25%. The degree to which you
are able to reduce your effective withholding rate is dependent
on many factors, such as the timing of RRSP withdrawals and
the amount of other foreign income. Foreign income can be
generated within your investment portfolio, but the amount
is dependent primarily on your risk tolerance and foreign
interest rates. The key is not to let the tax tail wag the
investment dog.
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By becoming US residents and leaving your RRSPs in Canada
, you are subject to the possibility of a double estate tax
on a continuing basis. The new Canada/US Tax Treat y does
not allow offsetting credits between RRSP/pension-type income
and US estate taxes, in effect, creating double taxation.
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The US Securities and Exchange Commission has regulatory
requirements barring Canadian brokers from selling investments
to US residents unless your Canadian brokerage firm has registered
in your state of residence. This typically means you will
only be able to SELL investments in your RRSPs/LIF. You will
not be able to make any new purchases (see Keeping Accounts in Canada for
more details).
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There are several administrative duties you must fulfill
every year as long as you keep any accounts in Canada . First,
you are required to report these accounts on the required
form to the Department of the Treasury each year. Second,
other IRS compliance forms are required in any year you make contributions
to, or withdrawals from, your RRSPs. You must also take the
appropriate Treaty election annually to defer the income inside
the RRSP. These should not be missed under any circumstances
since the penalties for doing so are severe.
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There is also currency risk you could incur. If you are
intent on retiring to the US , it means your future expenses
will need to be met with US dollars. If you leave a large part
of your assets in Canadian currency, it exposes you to
unnecessary currency risk.
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In general, Canadian mutual funds cost you more than twice
the management and administration fees than do comparable
US mutual funds. Therefore, a substantial annual reduction
in your investment expenses is available for your portfolio
on the US side of the border (see the Investment Planning
section). For example, $100,000 in Canadian mutual funds would
cost you approximately 2% to 3% or $2,000 to $3,000 per year,
whereas a US mutual fund would be approximately 0.25% to 0.75%
or $250 to $750 per year or less.
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One final risk that you take by leaving your
RRSP in Canada is that of government risk. In other words, you
are at the mercy of the Canadian government's ability to change,
for example, the withholding or other relating rules. A number
of years ago, non-residents could have withdrawn their lump
sum RRSPs at a net withholding rate of 15%. Now the withholding
rate is 25%. What it will be in the future is uncertain at best.
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Finally, simplifying your life by consolidating
all of your assets in the US at one brokerage firm has benefits
most don't realize until they do it. With a simplified financial
picture, it makes understanding it easier which allows you to
have more control over what happens. This tends to reduce stress
and bring a lot of peace of mind to you. |
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