It would be too easy. Taking your Canadian retirement assets, like RRSP (Registered Retirement Savings Plan), and roll into your U.S. accounts like an IRA. However, like most cross-border retirement issues, nothing is easy. For this reason, most people who have worked in both Canada and the U.S., have retirement accounts, and benefits, in both Canada and the U.S. Different tax rates, an ever-changing exchange rate, and many different accounts can make cross-border planning seem daunting. We are here to make it as easy as possible. This article discusses your RRSP options if you are now living and planning on retiring in the U.S.
Can I roll my RRSP into an IRA?
Let’s get right to the original question. No, unfortunately, you can’t roll your RRSP directly into an IRA here in the U.S. As I mentioned before, that would be too easy. First, let’s talk about IRAs and RRSPs.
An RRSP and an IRA are very similar.
- Tax deduction in year contribution is made
- Both grow tax-deferred
- Have required minimum distributions (age 72 for RRSP and IRA)
However, they also differ:
- IRAs have penalties if withdrawn too early (age 59 ½)
- Potentially different tax rates (25% tax withholding on RRSP withdrawals in the U.S.)
- RRSP allows much higher contribution limits (source: Sun Life)
An RRSP is very similar to an IRA, however, if you live in the U.S. you can’t combine them. Which brings up the next point. What are my RRSP options if I live in the U.S.?
Withdraw all of the money out of your RRSP
You can just take all of the money out of your RRSP and close your account. That will deal with one cross-border planning headache. However, does that make sense?
There are two main reasons that you may not want to take a total distribution out of your RRSP; taxes and the exchange rate.
There is 25% tax withholding on RRSP distributions here in the U.S. However, an RRSP withdrawal counts towards U.S. income as well. Therefore, a large RRSP withdrawal may push you into an even higher U.S. tax bracket. In this case, you may need to pay additional taxes on the withdrawal. It just doesn’t make sense to take a large RRSP withdrawal, just to give a big chunk of money to the tax man. For a more detailed breakdown of RRSP taxation, please read, “Taxation of Your RRSP, RRIF, CPP, and OAS in the U.S.”
The other factor working against you currently is the strong U.S. dollar and weak Canadian dollar. This is a very bad situation when converting Canadian dollars here to the U.S. As of March 2022, you would only receive 0.79 USD per each Canadian dollar. In other words, for each Canadian dollar that you bring to the U.S., you will get 79 cents. Although the future exchange rate is impossible to predict, we know that this is very low historically. It was only six years ago in which the U.S. and Canadian dollar were at the same value.
The Ugly Math Behind an RRSP Withdrawal
After taking into account the high taxes and poor exchange rate, a total RRSP withdrawal looks pretty bad. Here is an example of someone taking a $100,000 withdrawal currently from the RRSP.
|RRSP Tax Withholding (25%)||– $25,000|
|Exchange Rate (0.76)||– $18,000 ($75,000*0.24)|
|Total After Tax and Exchange Rate||$57,000|
You will currently only get about 57 cents on the dollar when you take an RRSP withdrawal here in the U.S. If this RRSP withdrawal pushes you into a U.S. tax bracket that is higher than 25%, you will get even less after taxes. We haven’t even discussed the state tax implications. Needless to say, this probably isn’t the best time to take a large RRSP withdrawal. However, there are times in which it may make sense to withdraw your RRSP.
Two Situations to Consider a Full RRSP Withdrawal
There are two reasons why an RRSP withdrawal may make sense, even with the poor exchange rate and potentially high taxation:
- Your RRSP is fairly small
- You are under age 59 ½ and need the money
If your RRSP withdrawal is fairly small, and you will never be in less than the 25% tax bracket here in the U.S., it may make sense to take a total RRSP withdrawal. Your taxes will probably not be impacted much by a small RRSP withdrawal in this case. The exchange rate is unfavorable, and it could get better. However, you may be paying high fees to maintain the RRSP and the exchange rate could always get worse.
Unlike an IRA or 401(k), there are no early withdrawal penalties on an RRSP withdrawal prior to age 59 ½. Therefore, if you are really strapped for cash and not yet age 59 ½, you may be better off taking the money from the RRSP as opposed to an IRA. However, this is probably not an ideal situation.
So, if I shouldn’t take a full distribution from my RRSP, what are my other options?
Convert to an RRIF and begin distributions
There is an alternative to taking all of your money out at once from your RRSP. You can convert to an RRIF (Registered Retirement Income Fund), and start smaller annual distributions. The big benefit of going this route? Lower foreign tax withholding.
15% vs. 25%
If you have an RRSP, you have the option to convert to an RRIF and start yearly distributions. The benefit of doing this is that there is only a 15% foreign tax withholding on the RRIF. This is a significant benefit, especially if you are in the lower 10% or 12% tax rate. Instead of paying taxes at 25% on RRSP withdrawals, and not use all of your foreign tax credit, you can just pay taxes at 15%.
Now for folks in the higher tax brackets, there is not as much of a benefit. This is because you will probably have to pay additional taxes if your tax bracket is over 15%.
If I’m able to save 10% on my tax withholding, why would I not want to convert to an RRIF?
The negative of converting your RRSP to an RRIF
It may seem like a no-brainer to convert your RRSP into an RRIF and save the 10% on tax withholding. However, there are a few reasons why an RRIF conversion may not make sense:
- Once converted to an RRIF, you will need to take an annual distribution for the rest of your life
- If your U.S. tax bracket is over 25%, you probably won’t save anything on taxes by converting to an RRIF
- If you withdraw too much from your RRIF, your tax withholding goes up to 25%
Once you convert your RRSP to an RRIF, you will need to start annual distributions. The next section discusses just how much you need to withdraw each year.
How much do I need to withdraw from my RRIF?
At age 71, at the latest, you will need to convert your RRSP to an RRIF and start distributions. However, you can convert earlier but if you do, you will need to begin distributions immediately and must continue for the rest of your life.
Here is a chart that shows how much you need to withdraw each year from your RRIF, based on your age.
As you can see from the chart above, if you are 70 years old, and have an RRIF, you will need to draw at least 5% from your account. If you have a $100,000 RRSP and convert to an RRIF at age 70, you would need to withdraw $5,000. This $5,000 withdrawal would only have 15% tax withholding here in the U.S. However, there is also a maximum RRIF withdrawal if you want only 15% tax withholding.
The Maximum RRIF Withdrawal
As we discussed, an RRSP has 25% tax withholding, while an RRIF only has 15% tax withholding. Which begs the question: Why don’t I convert the RRSP into an RRIF and withdraw the whole thing and only pay 15% tax?
As you probably guessed, it’s not that easy. There are two reasons why this strategy may not work:
If you withdraw more than 2 times the minimum withdrawal, you will be forced into 25% tax withholding
You are limited in how much you can withdraw from a RIF before you will be forced into 25% tax withholding (the same as the RRSP). You are limited to the greater of 2 times the minimum withdrawal rate, or 10% of the account value at the beginning of the year.
In the example above, the person had a $100,000 RRIF and was age 70. The minimum distribution is $5,000. However, if he were to withdraw more than $10,000, his tax withholding would go up to 25% in additional withdrawals.
If U.S. taxes are higher than the Canadian tax withholding, you will have to pay the higher U.S. tax rate on the withdrawal.
The money that you withdraw from the RRIF still counts as income on the U.S. tax return. If the tax withholding is high enough, you won’t have to pay additional taxes on the withdrawal. However, large distribution from the RRIF can kick you into higher U.S. tax rates, and the tax withholding may not be enough.
There are really three options for dealing with your RRSP here in the U.S. The below table shows the different options as well as the pros and cons of each strategy.
You have a lot of options when it comes to dealing with your RRSP here in the U.S. However, make the wrong decision and you could find that your RRSP is essentially wiped out by high taxes and a bad exchange rate. I strongly suggest working with a cross-border financial planner before implementing any of the strategie that are discussed above.
Need More Help?
RetireMitten Financial LLC specializes in working with families that have lived and worked in the U.S. and Canada. We can help you determine an RRSP withdrawal strategy that helps minimize taxes while increasing retirement income. Schedule a complimentary meeting at the button below.
thank you Bryan – i am having an unbelievably hard time accessing my locked in rrsp even in my 71st year. apparently, the issue is obtaining my signature and verifying my identity in order to start mailing distribution checks monthly, electronic signatures not accepted, notarized signatures not accept — only if I travel from US to Canada and sign in person, TD Bank — any suggestions? – thanks JM
Hi John, unfortunately this is a story I hear all of the time. I don’t have any easy way to help. I’d keep calling until you can get a hold of someone that can help you. You shouldn’t have to go to Canada to get this processed. Good luck.
My spouse and I have RRSP and LIRA accounts in Canada (total about 200K CAD) while permanent US residents. The financial institution for these accounts wants us to take out life annuities now that we are approaching 71 (this year), presumably with a monthly payout. Can we convert the RRSPs to RRIFs and then take annual distributions for life, or are we too late to do this now? The lower tax rate is appealing. What about the LIRA money? Can that be converted to RRIF, or is it only the RRSP that can be converted? By far our largest chunk is in LIRA.
Hi Clive, yes, at age 71, you are forced to convert your RRSP to a RIF and your LIRA to a LIF and start annual withdrawals at age 72. The withholding tax will be 15% from the RIF or LIF. Also, as a U.S. resident, you may have a one-time opportunity to unlock and withdraw the full LIRA but there will be 25% tax withholding.
OK, I thought a life annuity was a different animal than the RRIF, but what you’re saying is the financial institution will convert the RRSP to an RRIF (and LIRA equivalent) and then we’ll have an annual payout. Apparently when they talk about a “life annuity” this is what they mean. I wouldn’t use the term annuity but I guess it’s basically the same thing.
I’m confused about the RRIF withholding. I haven’t filed a Canadian tax return for many years. I have been told by a local CPA that any Canadian retirement income I have (CPP, OAS, RRIF) can be placed on my US tax return. If that’s the case, then what happens to the RRIF withholding? Does that go on my US return as well, or do I get the withholding money back from Revenue Canada each year because I have paid taxes on it in the US?
Hi Clive, You will include all of that income on your US tax return if you are a U.S. resident. The withholding done by Canada then counts as a foreign tax credit to help offset the taxes that you pay here in the states on that income. It helps ensure you aren’t double taxed.
That’s great and sounds logical. Is there individual US tax return software that you recommend to handle US-Canada cross-border filings?