Canadian Citizen And Resident Inheriting An IRA
If you are a Canadian citizen inheriting an IRA account while living in Canada, you need to carefully consider the tax implications of inheriting US-based assets. As a non-U.S. resident, usually the U.S. firm holding the IRA account cannot hold or manage the account for the Canadian beneficiary.
The U.S. firm will ask the Canadian beneficiary to move the assets to an eligible firm that can hold IRAs for Canadian residents or provide notice before liquidating the accounts, which can potentially lead to significant tax consequences.
Our cross-border financial advisors are dually licensed in Canada and the U.S. and can manage IRAs on both sides of the border.
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TAX IMPLICATIONS OF AN INHERITED IRA IN CANADA
If you are a non-U.S. citizen beneficiary living in Canada and have inherited an IRA, the distribution amount paid to you from the IRA is taxable in Canada and is subject to 15% withholding tax in the U.S. as long as the appropriate documents are filed with the U.S. Internal Revenue Service (IRS). We can assist you with completing and submitting these documents.
Distributions from the inherited IRA must be included in the Canadian beneficiary’s income in Canada. As a result, you must report the inherited IRA distribution on your Canadian income tax return. You can claim the foreign tax credit for the taxes paid to the U.S.
Lump sum distribution: You can withdraw the entire inherited IRA account. You can choose to receive it all at once, at any time. But withdrawing all the inherited money from the IRA account at once can expose you to significant tax consequences, including 30% U.S. withholding tax. Instead, you have the option to spread or defer the withdrawals over a period to reduce the tax burden in Canada and the U.S.
10-year distribution rule: If you inherited an IRA from a person who passed away on or after January 1, 2020, you are generally subject to the 10-year distribution rule. This means you can enjoy tax-deferred growth of the inherited IRA account for 10 years. But you must completely liquidate the account by December 31 of the 10th year after the year of the original IRA owner’s death. You may spread the withdrawals over the 10-year period to reduce taxes paid in Canada and the U.S.
Our cross-border financial advisors are experienced in helping clients navigate the tax liabilities that can arise from inheriting IRA accounts in Canada and the U.S.
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