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Phil Hogan, CPA, CA, CPA (CO)
Cross-Border Tax and Investment Specialist
I stumbled across another of your articles and you may be the guy to help me with my ROTH IRA question.
My wife and I will be moving to Vancouver in the summer and I’m wanting to do some tax and financial planning before the move. I’ve done some online research and perhaps converting my IRA to a ROTH IRA, or a portion of will be a good planning idea. Considering the ROTH will be tax free in Canada and the US after I become a resident this seems like a good idea.
Any thoughts? What am I missing?
Thanks for the email. In many cases converting a traditional IRA to a ROTH IRA before entering Canada and becoming a tax resident is a great idea. You will however need to properly review the tax consequences of the transfer. The main tax saving idea behind the ROTH IRA is often rooted in the differences in tax rates between the time of conversion and time of ROTH IRA withdrawals. If one can ensure that their tax rate at the time of converting the IRA (before moving to Canada) is lower than the rate at which they will eventually withdraw the money while in Canada, there can be a savings.
Let’s use an example to illustrate this point. Let’s say your US tax rate is 15% the year you intend to move to Canada. Likely because you may be recently retired or you have some flexibility in receiving income from business or corporations owned. Let’s also assume the IRA in question is $100,000. By converting the IRA to a ROTH IRA (assuming no early withdrawal penalty and it’s done before you move to Canada) you’ll pay $15,000 in US tax. Now, any distributions from this newly created ROTH IRA will be tax free for both US and Canadian purposes when you enter Canada. This is also assuming that you make the appropriate ROTH IRA elections in Canada on the first year entry tax return. If we assume further that your Canadian tax rate would be 30% in the subsequent years your effective tax savings on the ROTH conversion is essentially 15% (30% less 15%).
You experience this tax savings because if you chose not to convert the IRA before moving to Canada you would pay 30% tax on the distribution instead of the original 15%, essentially saving 15% overall.
Granted this does sound simple on the surface proper planning should be done to ensure that such a conversion actually works for your particular situation.
It’s also very important to ensure that required ROTH IRA elections are made and filed with CRA in the year you enter Canada and file your first Canadian tax return.
In addition to the ROTH IRA conversion you’ll want to review the rest of your holdings to ensure they can being managed from the US and whether investments should be transferred to Canada. Most US brokers will have a hard time managing US investments for Canadian residents.
If you want to discuss your US investments or potential tax planning issues please don’t hesitate to contact me at http://hutcheson.ca/phil and I’ll do my best to help.