Question of the Week: December 1, 2020

Can I roll my SEP IRA into my (traditional) IRA? I have dual Canadian/U.S. and am a resident of Canada. I’m still working, and plan to retire in about ten years. I have no plans to return to the USA.

Consolidating multiple IRA accounts, called an IRA rollover, can streamline and simplify your finances. Before you start taking RMDs (required minimum distributions), consolidating accounts can reduce account costs, trading costs, and your accounting bill. Added benefits include consolidated reporting for returns, asset allocation and risk metrics. Consolidation will reduce those pesky statements in your mailbox, and make changing your address that much simpler when you move. Once you start taking RMDs, consolidating IRAs will simplify your retirement cash-flow as you can receive one payment in lieu of multiples. You’ll also only receive one account tax statement come year-end. Lastly, consolidation will simplify your estate. Multiple beneficiaries can be clearly denoted on a consolidated plan, leaving your executor and estate with a clear and concise set of instructions, and not having to deal with multiple plans across different institutions. If you plan to elect multiple beneficiaries, they are free to separate the assets post inheritance, and are under no obligation to keep the plan consolidated, or even at same broker-dealer. Basically, you gain simplicity without losing any flexibility.

The IRS does limit how often you can consolidate your IRA plans, and there are certain caveats to consider as to what types of plans can be consolidated. In general, only one IRA rollover is permitted in any 12-month period, regardless of how many IRAs you hold.

The main difference between a SEP IRA and a traditional IRA is that in addition to the plan-holder, employers can also make contributions to a SEP IRA. As per the question above, the answer is yes, a SEP IRA can be rolled into a traditional IRA. Within the one-per-year rule, “you don’t have to include in your gross income any amount distributed to you from an IRA if you deposit the amount into another eligible plan (including an IRA) within 60 days (Internal Revenue Code Section 408(d)(3))”, according to the IRS. The U.S. IRA plans are recognized under the Canada – U.S. Income Tax Convention, and rollovers are therefore deemed a non-taxable event to the CRA. As long as the funds are rolled into another eligible plan, you do not need to report the distribution as income on your Canadian tax return, and there are no additional CRA forms or filings required in the year of the rollover.

The added simplicity of consolidating IRA accounts is even more relevant to dual citizens and cross border residents. Consolidation results in reduced annual elections and W-8 Ben requirements. Extrapolating on the quest for financial simplicity will lead one to find a Canadian financial advisor to manage the consolidated IRA. As a resident of Canada, you will be unable to contribute additional funds to your IRA, but you can open a Canadian RRSP, which allows for similar tax-deferred savings. It is possible to consolidate your financial advice in Canada, open a Canadian RRSP, and keep the IRA with a US based custodian. Added simplicity without the extra withholding taxes.

IRA rollover strategy suitability is unique to each individual, and will depend on their specific goals and circumstances. While the answer above is appropriate for the referenced individual, it is not to be extrapolated to all situations. Careful and detailed discussion with one’s investment and tax advisors, in advance of initiating action, is a crucial step in determining the strategies success.

Dixie Klaibert, CFA^®, is a financial advisor with both Raymond James Canada and Raymond James (USA) Ltd. She is a branch manager of Beacon Hill Wealth Management, an independent office of Raymond James Ltd (Canada). She specializes in cross-border asset management and financial advisory.

The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd. member of Canadian Investor Protection Fund.Raymond James (USA) Ltd. member FINRA/SIPC. Raymond James (USA) Ltd. is a wholly owned subsidiary of Raymond James Ltd. Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Dixie Klaibert, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their investment advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.