American citizens living in Canada may have already contributed to one or more US retirement accounts prior to moving, including a Traditional Individual Retirement Arrangement (“IRA”), a Roth IRA, a 401(k), a 403(b), and/or a 457(b).
Each of these retirement accounts comes with its own set of benefits for US residents. But do these accounts have the same benefits for Canadian residents? Often, Americans living in Canada want to know whether they should retain these accounts. The answer varies with each unique situation.
IRAs and 401(k), 403(b), and 457(b) accounts all receive tax-deferral treatment in the US; fortunately, Americans living in Canada continue to enjoy tax-deferral on their IRA, 401(k), 403(b), and 457(b) accounts – as long as they file the proper election with the CRA.
Keeping your US retirement accounts open is generally the simplest method of handling them if you are a US citizen living in Canada. However, when withdrawals are made down the line, they will be subject to higher Canadian tax rates as both the CRA and IRS will tax this income. Foreign tax credits are available from the CRA, but they may not fully offset the cost of US tax. Fortunately, planning solutions exist.
US citizens living in Canada also often wonder about investing in RRSPs. While the Canada-US Tax Treaty provides relief for some of the taxation issues that RRSPs can trigger for US citizens, one major issue is that the IRS does not allow deductions of income for RRSP contributions; however, the CRA does deduct taxable income based on RRSP contributions. RRSP contributions can therefore create a discrepancy in a US citizen’s taxable income where income is higher on the US side than the Canadian side. Foreign tax credits can provide relief, but may not be fully sufficient.
Note that TFSAs are viewed as foreign trusts by the IRS, so they are not ideal savings accounts for US citizens.
Ultimately, determining how to handle a Canadian-resident US citizen’s US and Canadian retirement accounts is a complex process that involves analyzing a client’s total financial picture.