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Preparing to Exit the United States for Canada?

By John McCord, Cardinal Point Wealth Management
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Oct. 3rd, 2011

A move to Canada from the United States is not as simple as many individuals and their advisors believe. Misconceptions exist due to a lack of experience and training. There are a variety of reasons for emigrating to or moving back to Canada. The rationale is often tied to family and employment matters. Importantly, one must prepare prior to a transition with years in advance when possible. A few notable items to consider are retirement planning, deferred compensation arrangements, currency conversion, the Canadian U.S. Tax Treaty, insurance and estate planning. Failing to create a comprehensive plan can be costly both in terms money and time.

After years of working in the U.S., Canadians frequently accumulate significant funds inside their Qualified Retirement Plans and IRAs.  A cross-border transition can make it difficult to preserve retirement assets held within U.S. based retirement plans.  Therefore, an appropriate strategy to manage these plans in a tax efficient and cost effective manner for future distributions is very important. A common misconception is that U.S. retirement accounts can be rolled over to Canadian Registered Retirement Savings Plans (RRSP) free of taxes.

Unfortunately, there is no single financial planning solution for U.S. retirement account holders who are moving to or returning to Canada.  Each individual will have different personal circumstances, income needs, goals, net-worth and income tax rates from their U.S. retirement accounts. All factors must be addressed when constructing a transition plan.

Actionable steps for consideration:

1. Rolling over Qualified Retirement Plans  - An Individual Retirement Accounts (IRAs) is an account vehicle that receives "rollover" assets from other U.S. based Qualified Retirement Plans (such as 401k or 403B accounts). Three common reasons for implementing rollovers are lower fees, greater investment options, and account consolidation. There are no tax consequences when rolling over a 401k plan to an IRA Rollover when done properly. Following a rollover, the funds inside the IRA rollover will grow on a tax-deferred basis until a withdrawal is made. All plan holders must begin their required minimum distribution (RMD) by age 70 ½, which is a mandate of the Internal Revenue Service (IRS). Canadian residents are required to pay tax at Canadian Revenue Agency (CRA) rates when a withdrawal is distributed.
   
2. Utilizing Roth IRAs - Roth IRAs can be used as a powerful retirement planning tool for individuals returning to Canada. Before the move, individuals can convert their IRAs, 401Ks and other Qualified Retirement Plans into a Roth IRA.  Under this scenario, ordinary IRS income tax rates are due on the entire conversion amount.  It can be sensible to convert funds into a Roth IRA over a span of years to minimize taxes paid to the IRS. Current IRS tax rates are lower than CRA rates which is an incentive for Canadians to convert into a Roth IRA prior to leaving the U.S. The Canadian government considers Roth IRAs to be pensions. This ruling allows all future earnings and withdraws from a Roth IRA to be exempt from CRA and IRS income taxes. Additionally, there is no Required Minimum Distributions (RMD) at 70 ½ years of age as is in the case of an IRA. The drawback of converting into a Roth IRA is that the account is funded with after-tax money, which can significantly reduce the balance of an existing retirement plan.

3. Redeeming U.S. retirement plans -- Depending on personal circumstances, U.S. retirement plans can be redeemed before returning to Canada. This strategy will enable them to utilize the favorable IRS tax rates. Of course, the U.S. retirement account holder will be forfeiting the benefit of allowing their retirement accounts to grow and accumulate within a tax-deferred basis.

There is no "one size fits all" cross-border financial planning strategy. Therefore, it is important to partner with a qualified team of tax, legal and investment professionals who specialize in Canadian and United States cross-border transitioning and asset management. Stay tuned for part two of "Exiting the U.S. for Canada?" or contact Cardinal Point Wealth Management at http://www.cardinalpointwealth.com/US/contactus.html to review your unique situation.

 

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