Inherited IRA from Father in the US. What are my options?

Question

Hi Phil

I inherited a fair sized IRA (over $600,000) from my US citizen father who resided in the US for over 30 years. My current Canadian broker is suggesting that I collapse the IRA and transfer a portion to my RRSP.

The US broker is suggesting that I leave it down in the US and continue to take small amounts from the account each year.

I’m getting conflicting information from both parties and would like some direction. Can I setup a consultation to discuss the matter this week?

Regards

XXXXXX

Answer

Hi XXXXX

We should definitely setup a consult soon to discuss the matters in more depth, however I’ll outline some of your options below with respect to the IRA:

You can definitely transfer a portion of the IRA to your RRSP as long a you can absorb the taxes withheld or paid on the distribution. Depending on whether you are a US citizen (not clear from your email) you’ll either pay a flat 15% tax and potential early withdrawal penalty on the distribution. Or your actual rate of tax paid on a US tax return in the case of US citizens. The calculations are more detailed, however generally speaking you’ll be able to transfer approximately an amount equal to your annual Canadian source income into your RRSP. Depending on your level of income you may be able to transfer a portion of the IRA each year.

Many Canadian brokers will suggest transferring the IRA assets to your RRSP simply because they have few options to manage the funds outside of Canada. It’s important to recognize that some Canadian brokers can manage US based investment and retirement accounts from Canada. Using a broker with these capabilities is highly advisable for clients with US investable assets. You can visit our directory here to view a list of available cross border brokers. I most cases, assuming your income is not fluctuating from year to year is is more efficient (and definitely easier) to simply leave the IRA as is and draw from the account throughout retirement. Often, deferring the distributions to future generations is possible with proper planning.

The least favourable option (often recommended by Canadian brokers) is to collapse the IRA completely and reinvest the funds in Canada. This option will result in a significant amount of unnecessary amount of tax. Unless you are desperate for the additional capital, this is not an advisable option. Some will try to convince you that the exchange rate deferential will make up for the tax, but that argument is simply ridiculous.

The options outlined above are only generally considerations and the full extent of your financial and tax situation should be reviewed before any options are fully considered.

Let’s setup a meeting soon to discuss your options. Please give me a call at 250-381-2400 and we can discuss your situation in more detail.

Regards

Phil