Question
I’m a Canadian citizen who used to work in the US (retired now.) I still have an IRA account, and I would like to start making withdrawals.
I was told that the withholding tax is 30%, but less if I claim the tax treaty exemption. I read that I can claim the withholding tax as a credit? What do I do here?
Answer
The lower withholding rate is 15%, but the catch is that this only applies to “periodic payments.” This generally means that instead of doing a standard monthly draw, you should consider doing infrequent and irregular lump-sum draws. Unfortunately, you’ll be subject to the IRA administrator’s discretion on the matter, and it could be that the admin feels otherwise.
Before you start any withdrawals, you’ll probably want to coordinate with the admin to make sure that they will only be withholding the 15%, prior to taking any actual withdrawals.
Because you are a Canadian resident for tax purposes, the 15% withholding tax paid to the US will be treated as a foreign tax credit. This means that you will include the IRA draw as income, but will claim the US tax paid as a direct credit against Canadian tax due.
Usual Disclaimer: This information is for general information purposes only, and deals with complicated and time-sensitive info that may not apply to your situation. Tax rules are always changing, and this information may not be current. Tax is complicated, this information is not tax advice, and don’t rely on this info to make tax decisions – Hire someone to help you.