Roth IRA and Non US Beneficiaries

Submitted by Howard Hook on Wed, 2010-03-24 20:43

If a Canadian citizen living in Canada with no other US income, benefit from being a beneficiary of a Roth IRA rather than a regular IRA?

Client, who is a US Citizen is deciding whether to convert their IRA to a Roth for the benefit of their son who is a Canadian citizen and lives in Canada with no plans on relocating to the US.

1)Before they do and pay income tax on the conversion they want to know if there is any benefit.

2) Can Canadian citizen even own an IRA or Roth?

Thanks to all as always.

Howard



Submitted by Anonymous (not verified) on Wed, 2010-03-24 20:58

There are a variety of regulatory issues with Canadians owning US investments, [u]BUT[/u] most US companies will make an exception to allow these accounts to exist in the beneficiay form (Inherited IRA). The biggest issue I see is how the distributiions are handled. The Canadian citizen will need to submit an IRS Form W8-BEN which serves the purposes of opting out of mandatory withholding of 30%. They will not be able to avoid the treaty rate withholding which can between 0% and 30% (I don’t remember what it is for Canada). The WH amount can be refunded with a variety of IRS forms. I think it can be a big hassle, but I have no personal experience with this procedure.

pko

Submitted by Howard Hook on Wed, 2010-03-24 21:14

Does all this go away if the beneficiary inherits a Roth IRA account since there is no income tax owed (assuming it is a qualified distribution)?

Thanks

Howard

Submitted by Anonymous (not verified) on Wed, 2010-03-24 22:02

Howard:

First off, I will say that I am not a CPA or tax expert, but I have dealt with this in a variety of ways at my job.

I wrote the response only with respect to the Inherited IRA, so “Yes” the WH rules will apply. I think the IRS is mainly concerned with distributions being sent outside of the US and thus will enforce these rules. I realize that taxes have been paid on the Roth, but don’t think it matters. In the same way that custodians will report distributions very generically, making sure the client will provide the IRS proof of the qualified status.

The W8-BEN will require the owner (beneficiary) to apply for a tax identification number (TIN) so that they have some data on the person receiving the money. The treaty rate will still apply. Without the TIN, the IRS will take 30%. I actually think that makes sense. You could have a variety of IRA owners (Traditional and Roth) simply avoid taxes by moving overseas. The IRS would have to go through a lot of trouble to get that tax money.

The only thing that might change the circumstances is if the distribution is delivered to a US address or bank, but I am not sure if the withholding rules change. I have not dealt with this in a while, nor do I have the resources at hand to give you a better answer. Maybe someone else can comment on what has been said so far.

pko

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