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Phil Hogan, CPA, CA, CPA (CO)
Cross-Border Tax and Investment Specialist
I’ll be moving to Ottawa from Boston late this year and I’ve been working through some financial planning with my broker. While doing some research online I came across your cross border tax articles, specifically the ones outlining IRA conversions.
I have $200,000 in IRA that are eligible for a ROTH conversion. Is this something I should be considering before making the move to Canada?
I would be happy to pay for a consultation if that would be easier
We should definitely setup a time to discuss your plan in more detail considering the potential complexity of the move. Not only from a financial planning perspective, but from a tax perspective as well. Significant upfront planning is recommended for any American thinking of moving to Canada, often regardless of the amount of assets owned before making the move up.
With respect to the IRA you have a few options. One of which, which you outlined below is the potential for an IRA conversion. In this case you’ll convert some of the existing IRA to a ROTH IRA. Going forward any distributions from the ROTH will not be taxable in the US and would also be tax free for Canadian purposes assuming you make the appropriate ROTH IRA elections with the Canada Revenue Agency. This election is required to be filed with the first year’s tax return upon entering Canada (not due until April of the year following your entry to Canada).
In most cases however there will be little benefit in making the IRA conversion and perhaps even additional tax owing if not properly planned. In order for the strategy to result in tax savings your tax rate should be lower in the year(s) you convert the IRA before entering Canada. If not you’ll simply end up paying more tax initially on the IRA conversion. For example, if in the year before you enter Canada your average US tax rate is 30% and upon entering Canada your overall tax rate will be 20%, you’ll pay 10% more in tax on the conversion. If the tax rates are switched in the above scenario you’ll experience a 10% tax savings. This is only a very simple representation of the cross border tax mechanics of a ROTH conversion and full estimates and planning should be performed to obtain accurate figures.
Please let me know if you would like to schedule a consult and we’ll find a time that works for you.