Canadians who spend time working in the United States can open and contribute to individual retirement accounts. Only income earned in the U.S. can be contributed to an IRA. If you open an IRA and return to Canada, you have a few options on how to handle the account.
Leave it Alone
The easiest course of action is to leave the IRA alone. If the account has a large balance, it might be subject to estate tax if you die before distributing the IRA. As of 2013, the first $5.25 million of estate value is exempt from the death tax. Although the U.S. Securities and Exchange Commission doesn’t require it, your broker may decide to close your IRA if you move back to Canada. You will then have to roll your IRA to another broker to avoid taxes.
You can take your money out of your IRA, but as a non-U.S. citizen, you’re subject to a 30 percent withholding tax. The money is also taxable in Canada at your marginal tax rate. You can claim a foreign tax credit in Canada so that you don’t pay taxes twice on the withdrawn amount. If you are younger than age 59 1/2, you’ll pay a 10 percent U.S. tax on early withdrawals unless you qualify for an exception. You can’t claim a foreign tax credit on this 10 percent, so it is subject to double taxation in Canada and the U.S.
You can take IRA distributions as “substantially equal periodic payments,” which means as an annuity. When you exercise this option, you can take money before 59 1/2 without triggering the 10 percent penalty on early withdrawals. The U.S.-Canada Income Tax Convention allows a lower U.S. withholding rate on these payments of 15 percent rate instead of the 30 percent rate that applies to non-U.S. citizens. You can claim a foreign tax credit on the withheld amount.
The Canadian version of an IRA is a registered retirement savings plan. Canadian law allows a lump-sum rollover from an IRA to a RRSP. The rollover is tax-free in Canada but still subject to U.S. withholding and penalties. This creates double taxation when you later withdraw the money from your RRSP account. However, Canadian foreign tax credit rules allow you to deduct the U.S. taxes against non-RRSP income when you withdraw the money. The tax credit rule limits the annual amount that you can offset in this fashion, so you might have to stretch out your distributions over multiple years to take full advantage of the rules.