IRAs taxable by other countries?

[smjsl]

I wonder if anyone here, especially US citizens living outside of USA, know and/or have experience with how IRAs are taxed by other countries? Both Traditional IRAs and Roth IRAs.

In thinking about whether to get Roth IRA, I see one potential disadvantage as possibly getting taxed second time on this after-tax money, if I end up moving to another country eventually...

If you have any interesting references on this, I'd appreciate them!

 

[bosco]

Your question depends to a very large extent on which country.

If the country is one that has a tax treaty with the US (as many do), then the treaty will set forth the rules.

In the case of the US and Canada, the country where the funds originate typically can tax the first 15%. The country of non-origination will then proceed to tax you, but will give you a credit for taxes already paid in the first.

It's a bit more complicated, and there are forms you must submit so that country B recognizes Country A's tax deferral scheme, but that is basically it.

I'm guessing your Roth will be taxed in the other country, usually, and you'll probably get no tax credit (except possibly the already taxed principal), but I'm not sure.

 

[Peter]

There's a discussion of this topic on the British Expats board:

US Mutual Funds unfavorably taxed - in IRA? : British Expat Discussion Forum

Peter

 

[smjsl]

Thanks for responses so far. I am in fact very much interested in Canada specifically. Based on Bosco's response sounds like Roth money would then indeed be taxed twice... !? :-(

But I realize this is a guess.. hoping others will contribute too.

 

[bosco]

Thanks for responses so far. I am in fact very much interested in Canada specifically. Based on Bosco's response sounds like Roth money would then indeed be taxed twice... !? :-(

But I realize this is a guess.. hoping others will contribute too.

In general, you need to realize that if you move to Canada as a US citizen you will pay more taxes.

The issue is not that taxes are all that much higher in Canada. If you consider your Canadian income tax to include what you would be paying in the states for health insurance premiums, they are fairly similar.

The problem is the tax treaty. The US recently changed how they interpret it. As a rough/crude example, Let's assume the amount of money on which you are not "double-taxed" under the treaty is $85,000 (it may be just a bit higher now).

Let's say your income is $105,000.

You shouldn't owe much US tax, right? Only tax on $20,000 in income? Not so fast. You are taxed on $20,000, but you are taxed on dollar $85,001 to dollar $120,000.

You will be filing dual tax returns, and likely remitting money to both governments.

Canada is a wonderful place to live, but the US will not release its talons from you easily--you would have to renounce your US citizenship and wait 10 years. A fairly drastic move.

If, like me, much of your income is US-sourced, then you will pay US income tax on that income, then write a cheque to the Canadian government for your tax bill in Canada, while receiving a credit on the tax you paid in the US. Renouncing would only make things worse for you. Also, envision yourself trying to tell a US customs agent why you chose NOT to be American. They might not fully understand....

There is a firm called Serbinski (google it) that has a lot of info on cross-border tax issues, and a forum.

Here's a link to the forum

Serbinski Accounting Firms :: View Forum - Canada / United States Tax & Accounting

In general I have simplified a complex topic.

Disclaimer: I am not an accountant, tax lawyer, or anybody knowledgeable--just a poor schmuck trying to get by. And yes, my US tax credit (which I think is legit) is being audited by Revenue Canada. And if you thought the IRS is bad--you ain't seen nothing until you deal with these guys. Plus, the Canadian system is even more byzantine and arcane, if you can believe that. Having lived and worked on both sides of the border, I can say that the system is not very well set up for those of us with one foot on either side.

 

[bosco]

I forgot to mention a fact you probably know. The US taxes you on worldwide income if you are a US citizen. Even if you have never set one foot in the US. It is one of only 2 countries in the world to do this.

So moving to Canada when you are young, and having no US-source income will not get you out of US taxes, unless you make less than the treaty amount--around $85,000.

Forgive me if I am belabouring the obvious.

Also, every year you have to inform the US gummit of any "foreign" bank accounts. Even if you live in the "foreign" country. Oh yes, almost forgot, don't smoke any Cuban cigars while in Canada. That's illegal too, even if you aren't in the US. Upon returning to the states, you could be arrested. This might strike you as silly but.....US law is so powerful that it doesn't stop at the border.

 

[M Paquette]

Canada is a wonderful place to live, but the US will not release its talons from you easily--you would have to renounce your US citizenship and wait 10 years. A fairly drastic move.

For what it's worth, the old '10 years of taxation' rule is gone. With the Heroes Earnings Assistance and Relief Tax Act (HEART) Act of 2008, IRC § 877A imposes income tax on the net unrealized gain on property held by certain U.S. citizens or green card holders who terminate their US residency as if their worldwide property had been sold for its fair market value on the day before the expatriation or residency termination (mark-to-market tax). There's also a 5 year lookback on income and tax liability, and a new transfer tax on gifts received from expatriates.

See http://www.jct.gov/x-44-08.pdf "TITLE III – REVENUE PROVISIONS", and Expatriate Rules in HEART

Basically, if you give up permanent residence, you pay a hefty exit tax. Drastic indeed.

 

[bosco]

For what it's worth, the old '10 years of taxation' rule is gone. With the Heroes Earnings Assistance and Relief Tax Act (HEART) Act of 2008, IRC § 877A imposes income tax on the net unrealized gain on property held by certain U.S. citizens or green card holders who terminate their US residency as if their worldwide property had been sold for its fair market value on the day before the expatriation or residency termination (mark-to-market tax). There's also a 5 year lookback on income and tax liability, and a new transfer tax on gifts received from expatriates.

See http://www.jct.gov/x-44-08.pdf "TITLE III – REVENUE PROVISIONS", and Expatriate Rules in HEART

Basically, if you give up permanent residence, you pay a hefty exit tax. Drastic indeed.

Thanks for the reference.

Something similar occurs if you stop being a Canadian resident, regardless of citizenship. All property is marked to market when you depart, and you pay capital gains on it--whether or not you already owned it at the time you became a resident.

Ultimately, the cheapest thing to do is stay in one place.....might not be as fun though

 

[smjsl]

Thanks a lot to bosco and M Paquette! (I will go over the links as soon as the time permits.) Bosco, there is nothing obvious to me in this area. So please feel free to add any other observations / facts.

Now, going back to my original question, do you know if the fact that I am withdrawing from a Roth IRA would get taxed by Canada? Presumably I would not owe any taxes on this in the US since I had payed them already.

If answer is yes, this affects whether I choose TIRA or Roth IRA while still in US. Withdrawing from TIRA will let me get that credit from one country for paying to another (i.e. I would pay ~ the higher rate of the two under 85k)... but at least I would NOT be paying twice... unless in case of Roth, Canada gives me credit for having already paid to US taxes on contributions...

I don't expect a large income in Canada since I am thinking of moving there to retire, so I believe I will be under the 85k limit (except maybe for first 1-2 years if I decide to move a bit sooner then retirement). Based on that described huge-tax-event, it sounds like with a lower income (<85k), it might be better to stay a citizen of both countries (something which may have additional value in any case in terms of keeping an option of returning back to US for example).

Thanks again!

 

[bosco]

Thanks a lot to bosco and M Paquette! (I will go over the links as soon as the time permits.) Bosco, there is nothing obvious to me in this area. So please feel free to add any other observations / facts.

Now, going back to my original question, do you know if the fact that I am withdrawing from a Roth IRA would get taxed by Canada? Presumably I would not owe any taxes on this in the US since I had payed them already.

If answer is yes, this affects whether I choose TIRA or Roth IRA while still in US. Withdrawing from TIRA will let me get that credit from one country for paying to another (i.e. I would pay ~ the higher rate of the two under 85k)... but at least I would NOT be paying twice... unless in case of Roth, Canada gives me credit for having already paid to US taxes on contributions...

I don't expect a large income in Canada since I am thinking of moving there to retire, so I believe I will be under the 85k limit (except maybe for first 1-2 years if I decide to move a bit sooner then retirement). Based on that described huge-tax-event, it sounds like with a lower income (<85k), it might be better to stay a citizen of both countries (something which may have additional value in any case in terms of keeping an option of returning back to US for example).

Thanks again!

I don't know for an absolute fact about the taxing of a Roth in Canada. I do know that until fairly recently, they were treated like an after-tax brokerage account (i.e. you had to pay taxes on distributions etc.). Now, I have HEARD that they are treated like other retirement accounts. I would do same research on the Serbinski forum (link provided earlier). I'm sure it's been discussed there.

If you have US-source pension income, then you really don't want to renounce your US citizenship. I think you would then pay non-resident tax-rates in the US on it.

A couple of other points. In Canada, there are no joint income tax returns. The tax scale is more progressive. If you are married, however, you can split your pension with your spouse to minimize your tax bill. The pension has to meet certain criteria, but most do.

Also, regarding the capital gains you have to pay on all property (whether it is in Canada or not) upon ceasing to be a resident of Canada: You are "deemed" to have sold your property on the day you depart Canada. You pay capital gains on the amount it appreciated from the day you became a Canadian resident. So keep good records. This tax only applies if your length of residency was less than 60 months.

Finally, before you become a Canadian resident, settle all your accounts--position IRAS etc. Changing custodians can be a real pain once you are not a US resident. Same with opening US bank accounts, credit cards, etc. Have then in place before you leave. Make sure your bank and broker are willing to deal with non-US residents (Wells Fargo and Fidelity are fine with it, others probably too).

Check out

Financial Webring Forum • View topic - If You're a Snowback Returning from the U.S.

and other topics on this Canadian financial forum. Most of the advice given here is applicable, but some is dated (like Roths).

Canada now has a vehicle similar to a Roth, so it has become a bit more tolerant of them. In some ways they are more flexible than a Roth in that you can put in $5000 a year, but if you don't do it this year you still can next year. And if you pull out the principal, you can put it back.

Spend some time on the relevant websites. Many things that are easy to do before you leave (such as rolling a 401k into an Ira) become impossible once you are a Canadian resident.

Hope this helps.