For U.S. citizens residing in Canada, understanding Registered Retirement Savings Plans (RRSPs) is essential for effective financial planning. This guide outlines the key information needed to manage Canadian retirement savings efficiently.
Introduction to Registered Retirement Savings Plans (RRSPs)
An RRSP is a retirement savings account governed by the Canada Revenue Agency, similar to a U.S. 401(k) plan. These accounts are tax-deferred, meaning the investments grow tax-free until withdrawal. Income earned within the RRSP is exempt from tax as long as it remains in the plan.
Contributions to an RRSP can be made by the account owner or their spouse/common-law partner until the end of the year they turn 71. These contributions are also deductible on Canadian tax returns. RRSPs are available for both employees and self-employed individuals.
RRSP Withdrawal Taxes
Withdrawals from an RRSP are subject to Canadian taxation, with the rate depending on the individual’s residency status and the withdrawal amount.
RRSP Withdrawal Tax for Residents
In the table below, you can see the tax on RRSP withdrawals for residents of all Canadian provinces except Quebec. (All amounts are given in Canadian dollars.)
| Withdrawal Amount | Tax Rate (Except in Quebec) |
| $0 – $5,000 | 10% |
| $5,001 – $15,000 | 20% |
| $15,001 + | 30% |
If you are a resident of Quebec, the withdrawal tax is considerably lower. You can see the rates for Quebec below.
| Withdrawal Amount | Tax Rate in Quebec |
| $0 – $5,000 | 5% |
| $5,001 – $15,000 | 10% |
| $15,001 + | 20% |
RRSP Withdrawal Tax for Non-Residents
Non-residents of Canada may contribute to an RRSP. Withdrawals by non-residents are taxed at a flat rate of 25%. If the RRSP is converted into a Registered Retirement Income Fund (RRIF), periodic pension payments may be made, reducing the tax rate to 15% under the U.S.-Canada tax treaty.
U.S. Tax Treatment of RRSPs
Under the U.S.-Canada tax treaty, U.S. citizens can defer taxation on their RRSP accounts. Previously, taxpayers were required to file IRS Form 8891 to elect tax deferment, but this is no longer necessary. Contributions to RRSPs are automatically tax-deferred under U.S. tax law, with retroactive relief applied in the first year that the election could have been made.
Although the RRSP is tax-deferred, withdrawals must be reported on U.S. tax returns. While this income is taxable, the Foreign Tax Credit may be used to avoid double taxation. However, RRSP withdrawals do not qualify for exclusion under the Foreign Earned Income Exclusion. Additionally, RRSP contributions may not be eligible for state tax deferral, as U.S. state tax laws vary, and states like California do not recognize international tax treaties.
RRSPs and FBAR Reporting
U.S. citizens with over $10,000 in foreign financial accounts, including retirement accounts like RRSPs, must file a Foreign Bank Account Report (FBAR). Filing an FBAR does not result in additional taxes or fees, but failure to report accounts can lead to penalties starting at approximately $12,500. To avoid penalties, it is recommended to include any uncertain accounts on the FBAR.
RRSPs may also need to be reported under the Foreign Account Tax Compliance Act (FATCA) if the total value of foreign financial assets exceeds specific thresholds.
Converting an RRSP to a Registered Retirement Income Fund (RRIF)
By the year you turn 71, an RRSP must be converted into a Registered Retirement Income Fund (RRIF). Once converted, contributions are no longer permitted, and a minimum mandatory withdrawal is required annually.
The annual withdrawal amount is determined by your age and the market value of your assets at the beginning of each year. You may withdraw more than the minimum, and there is no restriction on the number of withdrawals.
RRIF withdrawals are considered taxable income in the year they are taken and are taxed at the current applicable rate. For non-residents of Canada, lump-sum payments are subject to a 25% withholding tax, while periodic pension payments are taxed at 15%.
U.S. Tax Treatment of RRIFs
RRIFs are taxed in the U.S. in the same way as RRSPs. All RRIF withdrawals must be reported on U.S. tax returns.
Tax-Free Savings Accounts (TFSAs) and U.S. Taxation
Another option for retirement savings in Canada is a Tax-Free Savings Account (TFSA). Unlike RRSPs, TFSA contributions are made with after-tax dollars, but any earnings within the account are tax-free. As of 2023, Canadians can contribute up to $6,500 annually to a TFSA, with unused contribution room carried forward.
While TFSAs are beneficial for Canadian tax purposes, they present challenges for U.S. taxpayers. The IRS considers Canadian mutual funds held in a TFSA as Passive Foreign Investment Companies (PFICs), requiring the filing of IRS Form 8621. In some cases, the TFSA may be treated as a grantor foreign trust, necessitating additional reporting on IRS Forms 3520 and 3520-A.
TFSAs are also reportable on FBAR and FATCA filings. Due to the complexity and cost of reporting, it is generally recommended that U.S. citizens avoid holding TFSAs, as RRSPs offer more favorable tax treatment for retirement savings.