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I worked in the US for 15 years before moving to Canada which resulted in a retirement portfolio in the US that contains a traditional IRA.

Now living in Canada I have opened an RRSP and have contributed to it annually to continue saving for retirement and to help reduce my Canadian tax obligation.

Moving forward, should I look to contribute only (up to the limit) of my RRSP in an effort to reduce Canadian taxes? Or is there a reason I should consider contributing to the IRA as well?

I realize the recent plunging loonie complicates the answer because if I were converting from CAD to USD in order to contribute I'm at a disadvantage. I'm not looking to introduce currency swing into the question but more interested in fundamentals I should know about. So Consider I'm looking for an answer assuming the dollar was at par or another possibility would be to contribute to the IRA from savings which are already in USD but not in an IRA.

  • Is IRA shielded from taxes in Canada like the RRSP in the US? – littleadv Jan 22 '16 at 2:10
  • My understanding is traditional IRAs and RRSPs are covered in the cross border tax treaty. Roth IRAs, TFSAs and RESPs are not. For this question consider the accounts to be a traditional IRA and standard RRSP. – cclark Jan 23 '16 at 0:16
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One question to ask yourself is: do you like being double-taxed?

Let's assume that you are already contributing your maximum limit to the RRSP. Although it appears that contributions to your IRA could be deductible in Canada, it looks like this only applies to the extent that the IRA contributions would not exceed your maximum RRSP limit.

If you are already maxing out your RRSP contributions, then your IRA contributions will be nondeductible in Canada. Those contributions can still be deducted on your US return, but since your Canadian marginal tax rate is almost certainly higher than your US tax rate, you'll get taxed on the full amount in Canada anyway and what happens on your US return is irrelevant to your bottom line.

After making the contribution, yes, the earnings can certainly grow tax-free in the IRA up until the time you withdraw them...but whenever you withdraw the principal, it will get taxed a second time, so this is not a winning strategy.

(If your question was meant to be "what fraction of my total RRSP limit should I contribute to my RRSP vs my IRA?", then that would be a different answer...but perhaps my response will still be useful to others.)

  • If that's the case, then it seems like a Roth IRA might be a better choice - let the Canadians get their tax now, but make sure the later earnings are tax-free. – Joe Sep 26 '16 at 14:29
  • Unfortunately, contributing to a Roth IRA while living in Canada is not generally a good idea under the current treaty. If you do so, it's considered a "Canadian Contribution" which then effectively blows away the tax-free status of the account on the Canadian side for all years to come. – Scott Dudley Sep 26 '16 at 14:33
  • Well, that's no good. – Joe Sep 26 '16 at 14:34
  • I guess if you are investing it in a way that doesn't produce much immediate income - some funds are structured to reduce tax liability for example - it might still work, though, as long as you're planning to retire to the US (or a non-Canadian location)? But if you're not paying attention to tax liability (as you usually wouldn't in a Roth IRA) that doesn't work so well. – Joe Sep 26 '16 at 14:36
  • Don't forget the Canadian exit tax and the deemed disposition of assets, which would presumably apply to the Roth IRA assets too if you've made a Canadian Contribution...so I think you'd get taxed on it either way. – Scott Dudley Sep 26 '16 at 14:38

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