Canadian residents - CRA treatment of Roth IRAs is changing

[Red_y]

I know there are several Canadians on the board who may be in a situation similar to mine. I'm a US citizen and have a substantial Roth IRA account from the years I worked in the US. I've been a permanent resident in Canada since 2007.

Finally, we have a resolution to the treatment of Roth IRAs for people who have them, but are now resident in Canada:
http://www.cra-arc.gc.ca/E/pub/tp/itnew ... s-43-e.pdf

I've been dutifully filing my "protective claim" with the CRA each year, asking that tax on gains and earnings in my Roth IRA be deferred. If I'm reading this Technical News bulletin correctly, I should be able to file a one-time Election regarding my Roth IRA with the Canadian Competent Authority. From that point on, for all future and past tax years, any distributions, gains and earnings in my Roth IRA will be treated as a pension and subject to Canadian taxation to the extent that they are taxable in the US.

Therefore, if I follow the US rules governing Roth IRAs to avoid US taxation on them, all distributions, gains and earnings will also be TAX FREE in Canada as well.

All I can say is Yay! (and it's about time!).

I also posted this on the Financial Webring Forum.

 

[scio]

I'm glad you posted this. From reading through the ruling it looks like I will want to be sure and not contribute any funds to the Roth while living in Canada. There isn't a Roth equivalent for RRSPs is there? Hmm.

 

[scio]

A few more minutes of looking around and I discovered Tax Free Savings Accounts - they were only created in 2009 it seems.

 

[Ed_The_Gypsy]

scio,

Yes. And the Canadian Tax Free Savings Account is a better deal than our Roth. The eligibility does not expire every year as ours does. That is, if you can't contribute your $5k this year (for example), you can contribute $10k next year.

On the negative side, Canadians pay higher fees for any financial instrument than Americans do. And, no, they can't use Vanguard.

 

[kumquat]

And, no, they can't use Vanguard.

You can use Vanguard ETFs.

 

[Calgary_Girl]

A few more minutes of looking around and I discovered Tax Free Savings Accounts - they were only created in 2009 it seems.

I would be careful here. We live in Canada and my DH is an American citizen with Permanent Residency status in Canada. We file dual income tax returns every year and our Accountant told us that the U.S. government doesn't recognize TFSA's (yet) so DH can't contribute to a TFSA. If he does, he will apparently have to pay normal income taxes on the money; ie. it wouldn't be a tax shelter at all.

http://www.investmentexecutive.com/...88&cat=27&IdSection=27&PageMem=&nbNews=&IdPub=

 

[kombat]

scio,
Yes. And the Canadian Tax Free Savings Account is a better deal than our Roth. The eligibility does not expire every year as ours does. That is, if you can't contribute your $5k this year (for example), you can contribute $10k next year.

That's correct, but there's even more to it.

When you withdraw money from your TFSA, you actually get that contribution room back. You just have to wait until the next year to re-contribute it.

Example: I max out my TFSA this year with a $5,000 contribution. Then in December, my car dies and I need to take $4,000 out of my TFSA. Come January, I'm allowed to put that $4,000 back into my TFSA, in addition to the new $5,000 allowance for the new, current year.

Also, there are no age requirements for withdrawals, or associated penalties (as with Roth IRA's, and their 59 1/2 age limit). Put money in this year, take it out next year, put it all back in again the year after that (plus $5,000 more). It's all perfectly legal.

TFSA's are what Roth IRA's should have been. Frankly, as a Canadian, I'm shocked that the government gave us such a phenomenal savings tool.

 

[scio]

I would be careful here. We live in Canada and my DH is an American citizen with Permanent Residency status in Canada. We file dual income tax returns every year and our Accountant told us that the U.S. government doesn't recognize TFSA's (yet) so DH can't contribute to a TFSA. If he does, he will apparently have to pay normal income taxes on the money; ie. it wouldn't be a tax shelter at all.

U.S. not expected to respect new TFSA - News - News Investment Executive=

So perhaps the strategy would be to open the TFSA soon with a small amount of money to start accruing the $5000 / year of "space" in it and wait until the US hopefully recognizes it as somewhat equivalent to the Roth IRA and in the mean time make any desired retirement contributions to a RRSP and/or conventional IRA. I'm glad to have found this small corner of the internet where people are in situations similar to my own (US citizen living and working in Canada).

 

[Ed_The_Gypsy]

Harper set it up to keep people from taking their money offshore. Alex Doulis Take Your Money and Run - AlexDoulis.com is very popular.

That's correct, but there's even more to it.

When you withdraw money from your TFSA, you actually get that contribution room back. You just have to wait until the next year to re-contribute it.

Example: I max out my TFSA this year with a $5,000 contribution. Then in December, my car dies and I need to take $4,000 out of my TFSA. Come January, I'm allowed to put that $4,000 back into my TFSA, in addition to the new $5,000 allowance for the new, current year.

Also, there are no age requirements for withdrawals, or associated penalties (as with Roth IRA's, and their 59 1/2 age limit). Put money in this year, take it out next year, put it all back in again the year after that (plus $5,000 more). It's all perfectly legal.

TFSA's are what Roth IRA's should have been. Frankly, as a Canadian, I'm shocked that the government gave us such a phenomenal savings tool.

 

[kumquat]

Harper set it up to keep people from taking their money offshore. Alex Doulis Take Your Money and Run - AlexDoulis.com is very popular.

Despite the risk of making this political, No. Rich people can go offshore although they pay an "exit tax". $5K per year is meaningless to them.

 

[Red_y]

So perhaps the strategy would be to open the TFSA soon with a small amount of money to start accruing the $5000 / year of "space" in it and wait until the US hopefully recognizes it as somewhat equivalent to the Roth IRA and in the mean time make any desired retirement contributions to a RRSP and/or conventional IRA. I'm glad to have found this small corner of the internet where people are in situations similar to my own (US citizen living and working in Canada).

scio, a number of things come to mind--
1. You don't need to open a TFSA to accumulate "room". By virtue of being in Canada and at least 18 years old, you automatically accrue $5/yr, regardless of earned income. So if you didn't contribute anything to a TFSA in either 2009 or 2010, you have $10k you can contribute right now.

2. I wouldn't count on the US recognizing TFSAs any time soon. It took years to get Roths recognized by the Canadians; the Roth IRA has been around since 1998. You might just use the TFSA as an emergency fund, collect a little bit of interest on it, report the interest on your US return and pay a bit of tax on it. No big deal.

3. If you open RRSPs, there is a form you'll need to start filing w/ your US return -- Form 8891 "US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans". On this form, you'll take an election per the US-Canada tax treaty to have the US treat earnings and gains in your RRSP as non-taxable.

4. If you want to contribute to a US IRA, remember that your contribution amount is determined by your EARNED INCOME. Needing earned income to make an IRA contribution means you can't exclude all your Canadian earned income under the Foreign Earned Income Exclusion when you file your US taxes. Instead, you'll offset your Canadian earned income with Foreign Tax Credits. Not a problem, just a little more complex.

I do taxes for H&R Block in Canada now and worked for them for 6 seasons in America before I immigrated to Canada. I deal w/ cross-border stuff for clients occasionally. You're welcome to PM me if you have any questions.

 

[Ed_The_Gypsy]

Despite the risk of making this political, No. Rich people can go offshore although they pay an "exit tax". $5K per year is meaningless to them.

All I know is what I read in the paper.

 

[kumquat]

All I know is what I read in the paper.

You didn't read the book?

 

[Meadbh]

Frankly, as a Canadian, I'm shocked that the government gave us such a phenomenal savings tool.

I'm shocked too!

But not too shocked to celebrate!

 

[Ed_The_Gypsy]

You didn't read the book?

I own all of Alex Doulis' books. Just for amusement, of course. I have no investments in Canada.

I have been evangelizing TFSA's to the young folks I work with. They will never get a better deal. (The South Asians keep wanting to buy real estate in Pheonix or Vegas for investment, though. )