I am moving to Canada from the USA. What should I do with my Roth IRA?

For new Canadian residents, Roth IRAs can be tricky. But, if you haven’t moved yet, don’t panic! Just plan ahead. If you have already moved, keep reading, and pay special attention to the end of this article.

Let us help you with five steps you will need to take to ensure a smooth transition to Canada, with your Roth IRA in tow.

Step 1: Don’t be in a hurry to close your Roth IRA.

Great news! You can keep your Roth IRA open in the United States, while you are living in Canada. But, you can’t transfer your Roth IRA to Canada.

The problem you might face with leaving your Roth in the U.S. is that many U.S. financial firms will no longer allow you to hold your Roth IRA with them once you’re a resident of Canada. When you face this dilemma, you may be tempted to just “cash out” your Roth IRA. However, that’s not your only option (nor is it necessarily a good one)!

That’s where a dual licensed USA-Canada, cross-border financial advisor comes in. By working with Raymond James USA, you can hold your U.S. retirement accounts AND your Canadian retirement accounts, allowing you to maintain your Roth IRA while living in Canada.

So, don’t rush out and make a potentially huge tax mistake by fully withdrawing your Roth IRA.

Step 2: Don’t make contributions to your Roth IRA after you have moved to Canada.

Once you move to Canada, you will no longer be able to make contributions to your Roth IRA, unless you want Canada to tax the earnings on your Roth (which, we’re thinking, you don’t!).

Under the U.S.-Canada tax treaty, Canada does not view your Roth IRA the same way the U.S. does. Therefore, if you are contributing to your Roth IRA while living in Canada, Canada will view your Roth like any brokerage account and will tax you on all interest, dividends, and capital gains. This defeats the tax-deferral benefit of a Roth. (Sources: Article XVIII, Paragraph 8 of the US/Canada Treaty - https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997-2007.html)

However, there is a way for Canada to leave a dormant Roth IRA alone. That’s where Step Three comes in.

Step 3: Claim your Roth IRA as a pension during your first year in Canada.

The U.S.-Canada income tax treaty allows you to make a one-time election, claiming your Roth IRA as a “pension.” This election will allow you to continue to enjoy tax-free status on your Roth IRA by both the U.S. and Canada.

However, you must make this election within your first tax year in Canada (i.e., if your date of moving to Canada is November 1, the treaty election must be made by the Canadian tax deadline of April 30 of the following year). Should you fail to make the election by the tax deadline, file a late election as soon as possible to ensure your Roth receives its tax-deferred and tax-free status for good.

(Sources: Income Tax Folio S5-F3-C1, Taxation of a Roth IRA, Sections 1.15 - 1:17 https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-3-cross-border-issues/income-tax-folio-s5-f3-c1-taxation-roth-ira.html#toc6) (Sources: Article XVIII, Paragraph 7 of the US/Canada Treaty - https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997-2007.html)

Step 4: Don’t rush into Canada’s “version” of a Roth IRA.

You may have heard that Canada has a tax vehicle that is similar to a Roth IRA, called a TFSA (Tax Free Savings Account). Though the TFSA has similarities to the Roth IRA, it is important to know that the TFSA is not recognized in the U.S.-Canada tax treaty as a tax-free account for U.S. tax purposes.

That means, if you are a U.S. citizen moving to Canada, and you open a TFSA, Canada will recognize all earnings and withdrawals as tax-free. However, the U.S. will view all the earnings and capital gains in your TFSA as reportable income, thus defeating the tax-deferral benefit of the TFSA. The income and gains may not generate a U.S. tax liability. You must discuss this further with your cross-border tax accountant.

So, if you’re looking to open a retirement account in Canada, you may want to speak with us about an RRSP (Registered Retirement Savings Plan).

Step 5: Don’t wait to make a financial strategy.

The worst move you can make is to do nothing. That could spell H-E-A-V-Y tax consequences down the road. We know all of this takes time and planning. Time you probably don’t have since you’re planning a move!

So, let us do some of the legwork for you. Let our tax professionals offer some guidance. We’ll work behind the scenes, while you work on getting settled in Canada. Welcome!

*What if I’ve already moved to Canada and missed the deadline to claim my Roth IRA as a pension?

Call us today and we can speak with one of our tax professionals. There may be an option to petition the Canada Revenue Agency for tax relief. But don’t wait to call. We would love to help.

Disclosure: The information above is from sources believed to be reliable, however, we cannot represent that it is accurate or complete and it should not be considered personal tax advice. We are not tax advisors and clients must seek independent advice from a competent professional advisor on tax-related matters before withdrawing from their U.S. retirement plan.

Disclosure: This material has been prepared by Dean Huston and expresses the opinions of the authors and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. This newsletter is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member-Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member-Canadian Investor Protection Fund.

Raymond James (USA) Ltd. advisors may only conduct business with residents of the states and/or jurisdictions in which they are properly registered. Raymond James (USA) Ltd. is a member of FINRA/SIPC.