Canadian Residents with US Roth IRA
Deborshi Choudhury, an IRS Enrolled Agent with 17 years of expat tax experience, specializes in U.S. tax preparation, tax planning, and tax advice for U.S. citizens and Green Card holders living and working in the UAE and Canada. *Schedule a consultation with Deborshi today.
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Table of Contents
What is a US Roth IRA?
A Roth IRA is an individual retirement account (IRA) in the US designed to help individuals save for retirement with a tax advantage. It is usually contributed with after-tax income, which grows free of tax, so you can claim your distributions without worrying that the IRS will tax you for it.
Can Canadian residents get a US Roth IRA?
Generally, to contribute to a Roth IRA, your income needs to originate in the US. So, if you’re settled in Canada and aren’t making any US money, contributing to a Roth IRA might be off the table.
However, if you’re earning US-sourced income, you can be eligible to contribute to a US Roth IRA. And if you already have an existing Roth IRA during your time in the US, you could keep it and continue reaping its tax-free advantages.
What is the difference between US Roth IRAs and Canadian TFSAs?
Essentially, they serve a similar purpose in offering tax advantages from a retirement account, but they differ in eligibility, taxation, and withdrawal rules. Many US citizens consider TFSA the Canadian equivalent of a Roth IRA.
A Roth IRA is available to US taxpayers with earned income but is subject to income limits. Contribution limits are income-dependent, with annual caps set by the IRS, and withdrawals before age 59½ may incur penalties unless specific conditions are met.
A TFSA is flexible and not just for retirement. Canadians can contribute up to an annual limit, with tax-free earnings and withdrawals. There are no penalties for early withdrawals, unused contribution room carries forward, and withdrawals don’t affect social benefits.
Does the Canada-US tax treaty impact Roth IRAs for Canadians?
Yes, under Article XVIII of the treaty, if a distribution from a pension account (Roth IRA) is considered tax-free in the US, it will also be tax-free in Canada. So, the tax-advantaged benefit of a Roth IRA will also apply in Canada.
For contributions, you can preserve the Roth IRA’s tax-free status by making a one-time irrevocable election to defer Canadian taxation on the income accrued in it. So, as long as no contributions are made to the Roth IRA while the owner is a Canadian resident, the income within the Roth IRA can grow tax-free in Canada.
What are the procedures for the election?
To make a one-time irrevocable election to defer Canadian taxation on the income accrued in a Roth IRA, you need to follow these steps:
- Submit a letter: There is no prescribed form for this election. Instead, you must submit a letter to the CRA with your personal information, a statement indicating that you will defer Canadian taxation, and details of your Roth IRA.
- Timing: You need to file the election on or before your filing due date for the tax year, which is usually April 30th of the following year.
If you missed the filing deadline, you can contact the Competent Authority Services Division of the CRA to assess your situation.
Am I eligible to open a Roth IRA as a Canadian?
Here are factors you can consider when planning to open a Roth IRA:
- US-sourced income: You must have US-sourced income from a job done on American soil.
- Income limit: Your modified adjusted gross income for tax year 205 should be less than US$150,000 to qualify as a single filer. For married filing jointly, it should be less than US$236,000.
- Contribution limit: You can contribute up to US$7,000 if you are under 50 and up to US$8,000 if you are 50 or older.
Questions about a US Roth IRA as a Canadian? Contact us today!
Do I need to report my Roth IRA to the Canada Revenue Agency (CRA)?
Yes, any withdrawals or distributions you make from your Roth IRA need to be reported on your Canadian tax return. But here’s some good news—as long as you qualify for tax-free withdrawals, you won’t normally attract any additional tax.
You’ll typically report any distributions as part of the foreign income section on your tax return. It’s a bit of a roundabout way to do it, but it keeps everything above board and ensures you’re complying with the tax rules.
Can I rollover funds from my RRSP to a Roth IRA?
Here’s the thing: an RRSP (Registered Retirement Savings Plan) significantly differs in structural and regulatory system from a Roth IRA. So, considering the major differences between the two, transferring or converting US Roth IRAs to Canadian RRSPs is not allowed.
A Roth IRA is a US-specific, post-tax retirement account where contributions are made with taxed income, and qualified withdrawals are tax-free. In contrast, an RRSP is a Canadian pre-tax retirement account that allows contributions to reduce taxable income, with withdrawals taxed as income.
Instead, You could potentially withdraw funds from a Canadian retirement account, pay the applicable Canadian taxes, and then contribute those funds to a US retirement account, assuming you meet the eligibility requirements. However, this could result in a significant tax liability.
Can Roth IRAs be used in estate planning for Canadian residents?
Yes, but it’s worth noting that US Roth IRAs have distinctive tax and cross-border considerations for Canadian residents who are planning an estate.
The exact tax implications for the beneficiaries of a US Roth IRA depend on several factors, including the beneficiary’s residence and the specific nuances of the inherited IRA.
For example, under the US-Canada Tax Treaty, Canadians will only face US estate tax if their total worldwide estate exceeds US$13.61 million (2024 threshold). So, without proper planning, a Roth IRA inherited by a Canadian resident could be taxable in Canada.
How can I manage a Roth IRA when moving back to Canada?
Here are several tips to make the transition smoother for you:
- Work with a cross-border advisor: Engage with a financial advisor licensed in both the US and Canada. They can help you navigate the complexities of cross-border tax issues.
- File a treaty election: File a one-time irrevocable election under the Canada-US tax treaty to defer Canadian taxation on your Roth IRA.
- Understand reporting requirements: Make sure to still comply with both US and Canadian reporting requirements. Even with the election present, you still need to report any distributions from the Roth IRA on your Canadian tax return.
