If you're a Canadian resident with a traditional U.S. IRA (Individual Retirement Arrangement), you may be considering transferring your IRA to an RRSP (Registered Retirement Savings Plan) to simplify your financial situation in Canada. But before you make that move, it’s important to weigh the potential benefits of keeping your IRA intact. Here are five key reasons why it might be better to hold on to your IRA:
- No Taxation on Your IRA’s Value After Death in Canada Unlike RRSPs and RRIFs, the value of your IRA is not subject to taxation in Canada when you pass away. This is a significant advantage, as it ensures your beneficiaries won’t face added tax burdens from the Canadian government.
- Tax-Free Inheritance for Non-Spouse Beneficiaries Upon your death, your IRA can be inherited by your adult children or other non-spouse beneficiaries, even if they live in Canada. This inheritance is treated as a tax-free rollover in both Canadian and U.S. tax systems, which is not the case with Canadian RRSPs or RRIFs. Those accounts lose their tax-deferral status when the last spouse passes away.
- Tax-Deferred Growth After Death After your death, your IRA investments can continue to grow tax-deferred for many years. Your spouse can make minimum withdrawals from the IRA over their lifetime, while your adult children can take withdrawals over a period of up to 10 years, giving them the flexibility to optimize their tax strategy. If you pass before reaching the required minimum withdrawals, the account can continue to grow until the time comes for your heirs to begin withdrawing.
- Favorable Tax Treatment for Withdrawals Withdrawals from your IRA are only taxed when you take them, both in the U.S. and Canada. If you’re a non-U.S. citizen, you’re not required to file a U.S. tax return because the 15% U.S. withholding tax on IRA distributions is typically your final liability to the U.S. Additionally, periodic IRA payments to Canadian residents are subject to a 15% withholding rate, which is lower than the 30% rate that applies to lump-sum IRA transfers to an RRSP.
- No Need to Worry About Currency Conversion Fees If your investments are primarily in U.S. securities, keeping your IRA in its original USD currency can help you avoid conversion fees and unfavorable exchange rates. This can be especially beneficial if you plan to continue earning dividends or growing your portfolio in U.S. dollars.
While there are situations where withdrawing from your IRA or transferring it to an RRSP might make sense, the decision depends on your specific tax and financial situation. To explore your options, our team of tax professionals can help you understand the consequences of your choices.
Looking for a Canadian financial advisor to manage your IRA? Contact us today at cadence@raymondjames.ca.