When considering a move to Canada from the US, many consider tax moves to make between a US traditional IRA and a Roth IRA. Should a move to a Roth IRA be considered, if possible?
Taxation of Roth IRAs
For most individuals, tax rates in Canada are generally higher than those in the US. As such, strategies that result in fewer earnings being subject to Canadian taxation may prove beneficial before a move.
One benefit of a Roth IRA is that the earnings may be tax-free upon withdrawal in the US if certain conditions are met. For some, a conversion to a Roth IRA may be worthwhile to consider. While the conversion is taxable in the US, this will generally be at a lower tax rate if done prior to being subject to higher Canadian taxation rates.
Then, the amounts subsequently contributed to a Roth IRA forms part of an individual’s “basis,” or tax cost in the Roth and is generally not taxable.
Consult a Cross-Border Tax Accountant
If considering and traditional IRA to Roth IRA conversion, this must be done carefully. There are rules in both the US and Canada that may “taint” the status of a Roth IRA account. For instance, to be effective on a move to Canada, the conversion must be executed prior to becoming a resident of Canada. On the US end, the funds must be held in the account for five years for the earnings to be tax-free.
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Karlene J. Mulraine, EA, CPA, CA, CPA (NH) is the President of Cross-Border Financial Professional Corporation. Follow us on Linkedin and Twitter, or hang out on Facebook.
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The views expressed in this article are those of the author and should not be relied on to make decisions. Consider discussing your specific circumstances with an appropriate specialist.