The most common mistake made by individuals moving to Canada with US retirement accounts, such as 401(k)s, Traditional IRAs, SEP IRAs, or Roth IRAs, is failing to seek proper financial planning advice beforehand. Once you become a Canadian resident, several options become unavailable, leaving you with a single opportunity to optimize your finances prior to relocation.
What Are the Available Options?
Considerations include keeping the accounts with the existing custodian, commonly held through Fidelity or Charles Schwab, however, be mindful that trading may be significantly restricted, or you may be asked to close you account altogether once you advise them of your change in residency. An exciting opportunity presents itself to convert some or all of the funds from the pre-tax accounts to a Roth IRA. This transaction incurs tax consequences, as income tax must be paid on the converted amount. However, the tax paid will be at the current US tax rates, which are often lower than anticipated future Canadian tax rates. However, before rushing into the conversion, it’s important to exercise caution and engage in thorough planning. Several critical factors must be carefully considered, including liquidity requirements, the tax rate upon conversion, projected tax rates in retirement, and other relevant considerations.
Other options include transferring the funds to a Canadian RRSP, although this process is not as straightforward as it may seem. This transaction demands careful analysis and isn’t suitable for everyone, as the risk of double taxation remains significant.
Alternatively, you might opt to cash out the accounts, pay the relevant taxes and penalties, and then transfer the funds to Canada. We consider this to be the least favorable choice, however it may be a viable option for some, particularly if you aim to streamline your financial affairs and have a relatively small balance in the respective accounts.
Every option presents its own set of advantages and disadvantages, and the ideal choice will depend on the individual’s specific circumstances and objectives.
Are There Any Deadlines?
Some of these choices, such as the Roth IRA conversion, have time constraints and must be executed before your relocation to Canada to ensure it remains a tax efficient move. In addition, the more time you have before the change in residency, the greater the opportunities to spread the conversion of the IRA over multiple years. This strategy allows for the benefit of a lower overall tax on conversion.
While you can still convert funds to a Roth IRA after moving to Canada, it’s important to note that this would have detrimental effects. Income would be taxed at higher Canadian tax rates, and the CRA would not grant the tax-free status of the Roth IRA since the conversion occurs after establishing Canadian residency. Furthermore, to ensure you retain the tax-free status of the Roth IRA for Canadian tax purposes, it is important to make the one time election with CRA and avoid making future contributions to the account.
Whether you’re a U.S. citizen, Green Card or a Visa holder relocating to Canada, our pre-exit strategies focus on maximizing the potential of your existing assets. We can guide you through these choices to help you make the best financial decision. Book a consultation with us today to get started!