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Question For The Tax Planning and Investment Experts

EagerBeaver

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I just got through doing my American federal and state income tax returns on Turbo Tax, and one of the questions that came up was whether I had a Canadian registered retirment savings plan (RRSP) or Canadian registered retirement income fund (RRIF).

What are these plans, and what advantages are there to putting my money in one of these plans? I guess since Turbo Tax is asking me about it, other Americans must be doing it, and I am wondering what advantage there is, if any, to these retirement plans. I assume these are like IRAs but what advantages do they provide?
 
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metoo4

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My knowledge of US taxes is no tuch but I think you guys call it 401K plan. It's money you put aside for when you retire. When you put money on this plan, it's taken out of your net income so you don't pay taxes on it. It then grows without being taxed until you retire or cash it out. Some plans are paid jointly by employees and employers, some are only by employee or, more rarely, only by employer.
 

gallantca

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EagerBeaver said:
What are these plans, and what advantages are there to putting my money in one of these plans?

In order to contribute to a RRSP, you have to earn income and pay taxes in Canada. You are allowed to contribute a percentage of your Canadian income to a RRSP. I forget the percentage, but the max is around $18k per year and changes every year.

You don't pay taxes on this amount and the money invested in the RRSP grows tax free, until it is pulled out of the RRSP.

For people who haven't contributed, you can back contribute for previous years. This is an interesting option for people that stumble onto a chunk of change for whatever reason.

I don't know how a 401k works, but people often compare RRSPs to 401ks

There is an age by which you have to switch your RRSP to a RRIF and start pulling the money out.

Hope this helps
 

Franzappa

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Hello,

The RRSP (Canada) is similar to 401K. The IRS put this section because their is US citizens or US resident that worked previously in Canada and invested in them. Without being 100% sure, these people have to declare any capital gains realized within their RRSP for the previous year (my taxes courses are far away). If you do not have any RRSP in Canada, do not pay attention to this section. Do not forget to make your contribution in your 401K though.
 
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Ben Dover

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EB,

RSP (or RRSP) = IRA....

On an IRS form, this probably only applies to US residents who have lived and worked in Canada during the tax period in question (ie: 2006). If you have not lived in Canada, or earned income in Canada, then there is probably no way that you could contribute to an RRSP...

IRA and 401K contributions are also deductable in Canada for Canadians who lived/worked in the US but who are filing in Canada...

good luck!!

BD
 

Doggyluver

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First, only taxpayers earning an income in Canada can contribute to an RRSP. This can be a U.S. citizen working in Canada as well. If a U.S. citizen has an RRSP in Canada, if they are here or if they have returned to the U.S. and have opted to keep the plan they MUST report all the income earned by the plan on their tax returns, even if it is tax sheltered in Canada.

Second, forget the RRIF. This is an RRSP plan which has now been converted for the purpose of removing funds in the form of an income. There is no provision enabling anyone Canadian or American to make a contribution into a RRIF. This then is ONLY a plan to remove money from.

Any questions, feel free, this is what I do for a living.....LOL:rolleyes:
 

jacep

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Jou said:
Guys I've a tax specialist in my team but his rate is around 250$ an hour!
But he's jewish which is a enormous advantage when comes the time to talk about tax....

What bearing does him being Jewish have in terms of an advantage when it comes time to talk about tax?
 

Jou

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GUYS I just decided to delete my post. Many people here have no sense of humour. Even if my post was a little bit sarcastic, I can't believe I received a ¸PM mentionning:

- Jewish have been persecuted for 1000 years
- accusing me for beeing a racist

HEY RELAX, TAKE A BREATH, TAKE A STEP BACK!!!
 

metoo4

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Come on Jou, you should reasonably accomodate your accountant!

Ok, sarcastic too... :)

Everybody on this board got to be politically correct. ;)

But it does seems Jews have a thing for business. Nothing bad about this! They're good at it!
 

Jou

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thank god! I was about to kill my self for being such a NAZI...but the last 2 posts makes me change my mind!!!!

Believe me my tax specialist is well accomodated...He costs me a fortune every year!!!!!!! He's not working during the SHABBAT even if I'm working on Shabbat days.

But at the end of the year is really helping me much saving paying taxes.
Promess, to punish my self for posting sarcastic...I'll send money to Israel supporting found this year.
 

EagerBeaver

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Hey guys,

Thanks for the responses. What prompted my question is that I have been using Turbo Tax for a few years now and I don't remember getting the question about RRSPs and RRIFs until this year. I do have my own IRA to which both my employer and I make contributions, and I assumed that these plans are similar. I was just curious as to why Turbo Tax is asking me about them. I thought perhaps Americans were investing in them and maybe I was missing out on something here. It's good to know that I wasn't.

With the IRAs that we have in the USA, there is a steep penalty assessed if you withdraw any monies from the plan prior to age 59.5. Do the RRSPs and RRIFs have similar rules to discourage withdrawals?
 
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metoo4

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It must have sniffed some of your SPing experiences in Canada while you were writing reviews... :)

Seriously, any way you would have entered something about working or simply visiting Canada? Canadian tax refund stuff you may have to declare in USA maybe?
 

Doggyluver

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Tax software in both Canada and the U.S. allow for the fact that you may have contributed to an RRSP or are taking income from an RRIF in Canada. For Canadians the same rule applies if they had an IRA or a 401k, the income must be reported to the Canadian gov't.
 

EagerBeaver

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metoo4 said:
Seriously, any way you would have entered something about working or simply visiting Canada? Canadian tax refund stuff you may have to declare in USA maybe?

metoo4,

I did not get any Canadian tax refunds in 2006. I am not sure if a foreign tax refund is reportable if I had gotten one. I know that I got an income tax refund from the State of Connecticut in 2006 and I am prompted to and did report that (a form is even sent out on this), but there is no prompt in Turbo Tax requiring me to report any refunds from foreign governments (at least I don't recall this question, but last year it would not have applied to me). From the perspective of Turbo Tax, they are gifts and not income. I am not sure whether the law looks at it the same way, as I have not studied the Internal Revenue Code on this point.

I did get Canadian tax refunds in past years on hotel stays, but never reported them as income and never believed I was required to. Currently, all of my hotel bookings are done on Priceline and Hotwire and there is no Canadian taxes to refund as these are American companies.

When I did in the past do direct hotel bookings, and was eligible for refunds of the Canadian taxes, I found the process so onerous and cumbersome and the refunded monies were so minimal that it was a waste of my time. Eventually I started using Priceline, Hotwire and other online services to book hotels and it became a moot issue.

The net result of my tax returns this year was a refund from the federal government but I owe money to the State of Connecticut. I come out ahead when the refund and the payment are washed against each other.
 
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metoo4

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We're in the same bath as far as getting money from one level and paying the other one. Even got stuck once with a few thousand to pay to province. That hurt!

Must be the software read your reviews then! :)

I know the tax software I use in Quebec does ask me if I have any income from non-Canadian sources and, if you have retirement funds, it will ask what's the percentage of Canadian vs international investment you have in the plan, as you're allowed only so much for investment out of Canada to stay within limits of what's taxable within the limits of the retirement plan. Never got asked specifically if I had a US retirement plan. Have you asked others in US using same software if they had that question? Might be some field that triggered it? Or they just ask everybody in order to comply with some obscure requirements.
 
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EagerBeaver

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metoo4,

On the Turbo Tax software the question on Canadian RRSP and RRIF came up as a standard question. Nothing I said or did triggered it. However, I don't specifically remember this question in past years. Turbo Tax sent me a special CD for 2006 which was different in other respects than the software I had used in past years. They have something called deduction maximizer which they did not have in the past. In the USA we get tax deductions, for example, for the interest payments made on our mortgage payments, which encourages Americans to own rather than rent. I have heard that the Canadian taxing authorities do not permit this same deduction.

I think Canadian RRSP and RRIF may be a standard question now because some Americans may have earned income in both the USA and Canada and then placed the Canadian income in these plans. We have the same tax advantages with IRA plans in the USA as you do with these plans, as far as reducing your net income that you pay taxes on, and growing the retirement fund without being taxed. Perhaps, the Internal Revenue Service is deciding to give the same treatment to Canadian income earned by American citizens that is then placed in a RRIF or RRSP.
 

Ben Dover

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metoo4 said:
it will ask what's the percentage of Canadian vs international investment you have in the plan, as you're allowed only so much for investment out of Canada to stay within limits of what's taxable within the limits of the retirement plan. .

metoo -- I believe they changed this in 2005 and now you can have as many non-canadian investments (such as US stocks) you want inside the rsp...

One of these resident tax guys can probably confirm that...

BD
 

JustBob

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The February 23, 2005 budget eliminated the RRSP foreign content limit completely.
 

jacep

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EagerBeaver said:
With the IRAs that we have in the USA, there is a steep penalty assessed if you withdraw any monies from the plan prior to age 59.5. Do the RRSPs and RRIFs have similar rules to discourage withdrawals?

For RRSPs there are no penalties beyond the regular taxes that are withheld at the source (called "withholding tax") and that you might have to pay when you file your income tax return in April 30.

The withholding tax depends on how much you withdraw at a time and what province you live in. It is best to withdraw in amounts under $5000.

http://www.bmo.com/mutualfunds/ec/mutfund_taxes.html

Withdrawals from RRSPs without immediate penalties and with special conditions can be done in special cases like purchasing a first home (max: $20,000) or for continuing your education.

I've withdrawn from my RRSP when I knew that the year that I was making a withdrawal was lower than the time at which I made the RRSP deposit/contribution.
 
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