How to Convert an RRSP to an IRA

Although there are some differences between them, RRSPs are much like a traditional IRA. You can contribute a percentage of your earned income up to a specific limit, just like your IRA. You'll get a tax deduction, just like with an IRA. You can invest your capital in a wide range of products, just like an IRA, and that money will grow without taxation until you reach your retirement years. Yet, despite its similar structure and purpose to an IRA, a Canadian RRSP isn't considered a qualified plan under U.S. law. That makes things complicated when you want to come back to America.

Since the Canadian RRSP isn't treated as a qualified plan under U.S. tax laws, you have no simple process -- like a 1035 exchange -- for transferring tax-sheltered dollars from one plan to the other. Instead, you'll have to withdraw your capital from the RRSP. That's going to trigger a taxable distribution in Canada, which will take a big bite out of your capital. To add insult to injury, any gains over and above the cost basis are considered taxable in the United States. You can do it, but you'd have to be pretty motivated.

One way to approach the problem is to simply leave your RRSP in place, but stop contributing to it. Use that portion of your income to set up an American IRA or Roth IRA, and continue making contributions. When you retire, you convert your RRSP to a Registered Retirement Income Fund. That's a sort of specialized annuity that lets your money keep growing, but pays a regular income much like your IRA's Minimum Required Distributions. It'll complicate your life every year at tax time, as you report income from two countries, but this approach saves you from a very large tax burden.

Depending on the size of your RRSP holdings, leaving the plan in place might be more trouble than it's worth. If you only have a few thousand dollars socked away in Canada, it might be worthwhile to take the one-time tax hit and be done. You'll pay taxes to both governments, but then your nest egg is your own again. Your accountant or tax preparer will thank you as well, because you'll face a lot less paperwork every April. Surrendering your RRSP also eliminates the risk that changed tax laws in either country will catch you off-guard and trigger a tax liability.