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Level 3
March 8, 2020
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How to report Early withdrawal from Canadian RRSP account (Registered Retirement Savings Plan)

  • March 8, 2020
  • 3 replies
  • 9 views

I used to work for a Canadian company and that employer made contributions on my behalf to a retirement account (similar to 401K here). All the contributions were made before I move to the US so I didn't have any immigration status at that time (you may assume I was non-resident alien of US).

 

I decided last year to withdraw the whole fund from my RRSP account. Canada applied 25% withholding tax on the fund. Now my question is how to report that as an income to IRS? Based on what the section in the link below describes, I am not subject to tax on this income to IRS since the contributions were made before I moved to the US.

 

Foreign Contributions while a Nonresident Alien

https://www.irs.gov/businesses/the-taxation-of-foreign-pension-and-annuity-distributions

 

Please help me understand this situation better.

 

Thanks a lot

    Best answer by klehnhardt

    As mentioned above, the contributions were made to my account prior to becoming a US resident. I am copying a paragraph from the link I provided, it sounds like it's not taxable:

     

    Foreign Contributions while a Nonresident Alien
    Your contributions and your employer's contributions are not part of your Cost if the contribution was based on compensation for services performed outside the United States while you were a nonresident alien and not subject to income tax under the laws of the United States or any foreign country (but only if the contribution would have been taxable if paid as cash compensation when the services were performed).

     

    Foreign Contributions while a Nonresident Alien

    https://www.irs.gov/businesses/the-taxation-of-foreign-pension-and-annuity-distributions

     


     

    In the IRS Publication - The Taxation of Foreign Pension and Annuity Distributions that you cite also states  - As a general rule, the pension/annuity articles of most tax treaties allow the country of residence (as determined by the residency article) to tax the pension or annuity under its domestic laws. This is true unless a treaty provision specifically amends that treatment. Some treaties, for example, provide that the country of residence may not tax amounts that would not have been taxable by the other country if you were a resident of that country.

     

    Per the Treaty between the United States and Canada in ARTICLE XVIII Pensions and Annuities it states –

    Pensions and annuities arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State, but the amount of any pension included in income for the purposes of taxation in that other State shall not exceed the amount that would be included in the first-mentioned State if the recipient were a resident thereof.

    Based on the Treaty you pension payments are fully taxable on your Form 1040 up to the amount it would have been taxed if you were a resident of Canada.  That you cite also states that

    3 replies

    Level 14
    March 9, 2020

    As TurboTax does not support any nonresident tax forms, for any advice for nonresidents, I would suggest you contact Sprintax which is affiliated with TurboTax to assist our nonresident customers with their US tax returns.

    atatarokhAuthor
    Level 3
    March 10, 2020

    I assume you did not read my question carefully. I am a US resident. I was saying the contributions to the retirement account was made prior to becoming a resident of US. Now, am I subject to pay US tax when I withdraw fund from that account? If not, then is it ok not to report anything about it on the tax return?

    MaryK4
    Level 15
    March 11, 2020

    As a U.S. resident, you do have to report on worldwide income- It would be taxable in the U.S.

    @atatarokh

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    Level 2
    April 9, 2020

    Were you able to figure out? I have the same problem.  A hefty 30%  withholding tax was taken out when i withdraw mine. I read the link  and understand where you are coming from.  I can't even find a form to use. I would greatly appreciate if you can share how you deal with this.

    atatarokhAuthor
    Level 3
    April 10, 2020

    I am not sure if I reported it correctly. I am planning to discuss it one to one with a CPA in the following weeks.

    What I did is the following, I reported the amount of money I withdrawed from the account under Federal Taxes, wages and income, Canadian Registered Pension Income.

    And then under deduction and credit tab, I chose Foreign taxes to get credit. I get full credit on the amount of taxes I paid to Canada but the credit doesn't apply to this year of my tax return. I have to choose carry over option to the next year.

    Level 2
    April 11, 2020

    Thank you!. I have to revise my return. I did not receive my T4RSP till recently. I'll try to get hold of an accountant too and see what she has to say. In the meantime, I'll try to do what you did.  I'll let you know also if i found out something.

    Level 2
    April 10, 2020

    Were you able to figure out? I have the same problem.  A hefty 30%  withholding tax was taken out when i withdraw mine. I read the link  and understand where you are coming from.  I can't even find a form to use. I would greatly appreciate if you can share how you deal with this.