So, you’ve run off to Canada (or somewhere else that isn’t the US), but you still have that pesky US passport or Green Card. Turns out Uncle Sam still cares about you. A lot. Lucky you.
Unfortunately for you, we live in the times of “Nope, not dealing with non-residents anymore”, resulting in people getting their accounts restricted, or flat-out closed accounts. So if your American bank or brokerage recently sent you a lovely “We are closing your US account. Have a nice day,” read on to get an idea of what happens.
Why the Sudden Purge?
- Non-Resident = Please Leave
If you live outside the US, you’re considered a non-resident for these oh-so-fun regulations. Doesn’t matter you’re a US citizen or Green Card holder; once you’re across that border, you’ve magically transformed into a compliance risk. - Regulations? Didn’t They Always Exist?
Yeah, they did. But like many rules, nobody really paid attention to them for years. These days the banks have decided they’d rather not poke the IRS bear (it has big teeth). - Tightened Enforcement
Financial institutions started reading the fine print and realized they either follow the rules or face fines that cost more than your account’s balance. Guess which path they chose?
If you hold a standard brokerage account, you might be able to jump ship to another brokerage, if you can find one that still smiles at non-residents. But what if your account is tax-deferred, like an IRA or 401K? Buckle up: the same forced exodus applies.
The IRA/401K Shuffle: Surrender or Strategize
The 60-Day “You’d Better Hurry” Rule
When you get the dreaded letter saying, “Move your IRA/401K or else,” you’ll generally have a short window to transfer those funds to a new service provider. If, in some cosmic twist, the account is actually liquidated and a check lands in your mailbox, you have 60 days to shove that money back into another retirement account (with a US custodian, of course) or watch it become fully taxable. The clock is ticking, folks!
Oh, and heads up: inherited IRAs (including Roth or SEP) don’t get that 60-day break. If you get an inherited IRA distribution, it’s basically “Game Over.”
Good Luck Finding a Provider
Even if you manage to find someone who says, “Sure, we’ll take your IRA,” they might restrict you to the point where your account is on life support (read: effectively frozen). So, faced with these headaches, a lot of Canadian-resident folks just throw in the towel and liquidate. Except that doesn't exactly help either.
Double the Taxes, Double the Fun
Liquidating a US retirement account while living in Canada can trigger a delightful combo: Uncle Sam and the CRA both lining up at your door. Two main scenarios pop up a lot:
- US Citizen Moves to Canada
You remain a proud US citizen or Green Card holder, but become a Canadian tax resident (yay, two countries to report to). - Canadian Citizen Moves Back Home
You worked in the US for a while (maybe on a visa), contributed to a US retirement account, and then headed back home. (Oil guys, tech guys, and athletes do this a lot.)
We’ll break down each scenario, because the tax folks apparently love splitting hairs.
Scenario 1: US Citizen Turned Canadian Tax Resident
Deemed Disposition
When you become a Canadian resident, you’re generally “deemed” to have sold and re-bought your stuff at fair market value, excluding certain US retirement accounts. Those keep their historical cost basis, meaning there’s no stepped-up cost for Canada or the US.
US Tax
- Traditional IRA or 401K distributions? Taxed at ordinary income rates (which, depending on your mood, can go up to 37%).
- If you take the money out “early,” expect additional penalty taxes because the IRS apparently never got the memo that people sometimes need their own money.
- Roth IRA distributions? Generally tax-free in the US.
Canadian Tax
- Canada also wants its cut on any distribution you receive. And no, they don’t care that you didn’t get a deduction back when you contributed in the US.
- If it’s a Roth, Canada says “fine, we’ll let that be.” But for everything else, you could be dancing around a 50%+ top rate, depending on your province of residence.
- You do get a foreign tax credit for whatever you actually paid to the IRS, except for those nasty early withdrawal penalties, because of reasons known only to CRA.
Net Result
You’ll probably end up paying Canada’s (usually higher) rate overall. The US foreign tax credit reduces the Canadian bite, but it rarely eliminates it. Basically, you’re stuck with the difference.
Scenario 2: Canadian Citizen Resuming Canadian Residency
Remember that 30% non-resident withholding rule you conveniently forgot about while living in the US? Well, now you have to remember.
US Withholding
- By default, non-resident distributions from a US retirement account face a 30% withholding. The Canada-US tax treaty sometimes drops it to 15% for “periodic” payments, but service providers are often reluctant to apply it for lump-sum “liquidations.” So, yeah, brace for 30%.
- You can file a US non-resident return later to try and reclaim some of that.
- The Early withdrawal penalties are usually baked into that final 15% or 30%.
Canadian Tax
- Canada still taxes the full distribution, same as Scenario 1.
- You claim a foreign tax credit for the US withholding to avoid paying the same tax twice. But guess what? It’s still rarely a total get-out-of-jail-free card. Canada’s rates tend to be higher, so you’ll likely pay the difference between the US rates and the (higher) Canadian tax rates.
Bottom Line
You wind up paying Canada’s higher marginal tax. Sensing a pattern here?
The Great RRSP “Solution”... or Maybe Not
Some cross-border gurus say, “Hey, roll your IRA into an RRSP so you can keep deferring the tax!” That was a decent trick before the US got serious about that 30% withholding. Now, by the time you shift your IRA to Canada, you’ve possibly eaten a big chunk of tax upfront. Doesn’t sound like a sweet deal, does it?
Also, keep in mind: many service providers who push you to liquidate or roll your IRA into Canada are simply not licensed (or not willing) to manage IRA accounts for non-residents. They want you out. But if you can find a firm willing and able to handle your US retirement account (I can make introductions), you might avoid liquidation and the immediate tax hit altogether.
Parting Thoughts (From a Mildly Cynical CPA)
- Don’t Wait for the Hammer
If your broker says “Out you go,” start scrambling early. You might find another US institution that’s okay with non-residents, but be prepared to fill out enough paperwork to kill a forest. - Double Taxation Is Real
The big “gotcha” is paying tax to two countries on your distributions. The foreign tax credit helps, but not enough to bring the rates down to “free money” territory. - Remember the Clock
In many IRA scenarios, you have 60 days to roll the funds into another account. If you blow the deadline, the IRS is happy to declare it fully taxable.
Good luck, Taxpayer. Here be dragons.
**Usual Disclaimer: What is written here is not formal tax advice. I’m not your CPA. It’s possible, or dare I say even probable, that the comments and opinions expressed here contain material errors, are out of date, or that important stuff has been left out. Don’t use this info to make tax decisions. Hire a pro to help you.