What to Do with Your Inherited IRA in Canada
Tiffany Woodfield, Senior Financial Advisor, Associate Portfolio Manager, CRPC®, CIM®, TEP®
Summary of Key Points
Inheriting a US IRA while living in Canada creates financial and tax complications.
Three main areas to consider are tax planning, currency, and investment management.
Traditional IRA withdrawals are taxable income; Roth IRA withdrawals are usually tax-free after five years.
Non-eligible beneficiaries must withdraw inherited IRAs within 10 years; eligible beneficiaries have more options.
Common mistakes include misreporting income, poor timing of withdrawals, and misunderstanding required distributions.
Video Script
In this video, I’ll go over the 3 main complications to consider when inheriting an IRA in Canada.
Whether you’re a Canadian or American, inheriting an IRA creates added complexities that need to be addressed if you live in Canada. My goal with this video is to give you an overview of what to consider so you don’t make any costly mistakes.
Hi, I’m Tiffany Woodfield, a cross-border advisor, associate portfolio manager, and co-founder of SWAN Wealth Management.
Over the past few years, I’ve spoken to hundreds of people with cross-border investments. And I’ve noticed that there tends to be a lot of confusion around how to deal with a US inheritance.
Do I need to move it to Canada?
What are the tax consequences of the inheritance?
How do I access the money?
Should I roll my IRA into an RRSP or TFSA?
These are all questions that come up! So, let’s get into it!
You need to know about three main things:
Tax Planning
Currency
Investment Management
When it comes to tax planning and inheriting an IRA in Canada, you must be meticulous because of the ever-changing rules.
Working with a cross-border accountant and a cross-border advisor is critical.
First, as a non-eligible beneficiary of an inherited IRA, you must liquidate the account by the end of the 10th year following the IRA owner’s death. You can take it out in a lump sum right away, slowly over 10 years or wait until the end of 10 years.
And if the decedent had already been taking RMDs, you used to have to continue taking the RMDs, but in 2024 the IRS waived this requirement.
An eligible beneficiary, particularly a spouse, has more options. IRA distributions can be taken as a lump sum, in periodic payments, or rolled over into another retirement account.
Either way, you need to keep in mind, when you withdraw money from an inherited IRA, it’s a distribution, and you will need to report it on your Canadian tax return because you are a Canadian resident. For the US tax liability, there is withholding tax when you take the money out of the inherited IRA. Foreign tax credits help to avoid double taxation.
There are two common mistakes that people make.
Misreporting income can lead to double taxation or significant penalties.
Overlooking planning when to take distributions can lead to paying more tax.
For inherited Roth IRAs, distributions are generally tax-free, provided that the account has been open for at least five years. Roth IRAs do not have RMDs during the original owner's lifetime, but beneficiaries must follow certain distribution rules upon inheritance which are the same RMD requirements as with a Traditional IRA.
When it comes to investment management, working with a cross-border advisor is key.
Different investment regulations exist in the U.S. and Canada. You must be compliant with both countries’ laws to avoid penalties and legal issues.
In addition, investment choices might be limited due to cross-border restrictions.
Finally, you’ll want to ensure your IRA fits into your overall financial and retirement plans.
Working with an advisor who is licensed in the US and Canada is helpful because they can manage your IRA no matter where you live.
At SWAN, we specialize in cross-border investment management. We know how to help you plan, manage your assets and minimize tax.