Q & A- IRA issues in retirement for US citizens in Canada

Hi Tony,

I was referred by XXXXXX of XXXXX that I contact you.  My wife and I are dual citizens (American and Canadian) living in Canada and filing US and Canadian tax returns annually.  Our question relates to the RMD’s (Required Minimum Distributions) I will begin taking in 2015 (the year I turn 70 1/2).  The bulk of our resources are in my IRA and, given that we are required to file our taxes individually, I will be in a very high marginal tax bracket in Canada while my wife will be in a low one.  Our current (Canadian) tax accountant has calculated that, due to that disparity, we will end up paying approximately $9,000 in extra taxes per year (over what it would be if we were to move back to the States).

That’s a lot of money to us our question is:  are there strategies that would minimize or eliminate that problem.  FYI, my IRA has a balance of ~$i.85 million and we have another $500,000 in a joint account.

Hi XXXXXX,

Given your situation of  being a higher income earner and your wife having low income combined with the inability to pension split the IRA in Canada and the higher overall tax rates in Canada, you will generally run into a situation of potentially paying a lot more tax.

The main issue is caused by the inability to pension split the IRA. Generally, one option may be to transfer the IRA into an RRSP, which then would allow you to pension split with your wife. That said, given your age, you don’t have the ability to transfer the IRA to an RRSP over multiple years and given the amount of the IRA, a full transfer would create a massive US tax bill in the current year in which the foreign tax credit in Canada may not be able to be fully utilized. So I don’t believe this is an option for you unfortunately. A partial IRA transfer to an RRSP could be an option, but still would likely create a big tax bill in year one and may not end up being that tax efficient in future years.

So unfortunately, unless Canada starts allowing pension splitting of IRA’s you are likely not going to be able to avoid the tax hit.

Please let me know if you have any other questions.

Tony

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