My advisors is telling me to withdraw my IRA?
Question
Hi Phil, I’m a member of the Facebook page. Maybe you can help me with some planning I’m trying to do for the coming year.
I moved to Canada last year and my plan is to remain in Canada permanently. The only thing left in the US is my IRA ($400,000) that I would like to get up to Canada somehow so I don’t need to worry about having anything in the US going forward. I also don’t expect to pull anything from it until well after retirement. I’ll be making around $150,000 in salary in Canada.
My accountant thinks I should just leave it down there, but I really don’t want to have anything to do with the states anymore. My new investment advisor is pushing me hard to withdraw the funds and move it up to Canada. I know I’ll end up paying tax and penalties on the withdrawal but he said the that difference in exchange rates would make up for the tax.
He also suggested that I use my current RRSP contribution room to contribute to my RRSP to offset any of the IRA income I receive. I have about $80,000 of RRSP room that I never used when I moved out of Canada in my 20s.
Would love to hear your thoughts on my situation and if you have any suggestions. I would be happy to pay for a consultation to figure this out.
Thanks for your time.
XXXXXXX
Answer
Hi XXXXX
Thanks for your emails and welcome back to Canada!
We get this question a lot and unfortunately your advisor is giving you bad advice. It’s very likely that your investment advisor is suggesting this option as it’s the only way it allows her to manage the funds. That is not however a reason to give bad advice. The idea that you would accelerate tax on this account because the “exchange rate differential will make up the difference” is terrible financial and tax reasoning. Also, the the suggestion to use your RRSP contribution room to offset the inclusion of the IRA withdrawal simply results in losing the RRSP contribution room for the future. it would be much more beneficial to simply use your RRSP contribution room against your current income of $150,000 annually. Assuming of course that you have access funds to contribute.
By withdrawing the funds at your income level the extra tax on the IRA distribution would be over 40%. Regardless of what the exchange rate is that would not be a reason to withdraw the funds if you had different options. Remember, the exchange rate would result in you paying an even higher level of tax on the income converted to Canadian dollars.
Your accountant gave much better advice in suggesting leaving the IRA in the US, however it sounds like you want to move everything up to Canada.
In that case I almost always suggest transferring the IRA up to a cross-border investment/wealth manager that can hold the account intact in Canada. That way the account can stay registered and can continue compounding tax-free.
Once you reach retirement age and your income drops you’ll be able to withdraw the funds at much lower tax rates.
The difference in tax on withdrawing the funds right now versus waiting until retirement is significant. For example, tax at 40% on the $400,000 would be $160,000. If, in retirement your effective tax rate drops to 20% (or lower potentially) you would only end up paying $80,000 in tax. That’s a difference of $80,000! Definitely not a trivial amount.
I hope the information above has been helpful and please let me know if you need me to send out a referral to a cross-border investment manager that can help.
Cheers
Phil