A US traditional individual retirement account (IRA) functions similarly to a Canadian registered retirement savings plan (RRSP): contributions may be tax-deductible and withdrawals are generally taxable when taken in retirement. Likewise, a 401(k) plan in the United States resembles a defined contribution (DC) pension in Canada. Both types of plans permit tax-deferred accumulation, but the rules that apply on death and to beneficiaries can differ significantly between the two countries.
Spousal beneficiary
When a spouse inherits a US retirement account such as an IRA or a 401(k), they typically have two main options. They can accept the account as an inherited account that remains in the deceased’s name, or they can transfer the funds into their own IRA or 401(k). Transferring the account into the surviving spouse’s own plan generally preserves the tax-deferred status and can simplify future withdrawals.
Both IRAs and 401(k)s are generally subject to required minimum distributions (RMDs), which currently begin at age 73. For Canadian residents inheriting US retirement assets, withdrawals are subject to US withholding tax and are also taxable in Canada; however, Canada will generally allow a foreign tax credit for taxes already withheld by the US.
It is also important to note that a US citizen living in Canada must report worldwide income on both Canadian and US tax returns. This dual-reporting obligation affects how income from inherited US retirement accounts is reported and how foreign tax credits are claimed.
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Non-spouse beneficiary
A non-spouse beneficiary inherits US retirement accounts under different rules than a spouse. Unlike many Canadian retirement arrangements — where a deceased plan holder’s RRSP, DC pension or other registered savings are often included in the final tax return and taxed in the year of death — an inherited IRA or 401(k) is not immediately taxed when it passes to a non-spouse beneficiary.
Instead, the beneficiary pays tax only when they withdraw money from the inherited account. This timing can create opportunities to defer tax and reduce the overall tax burden. For example, a deceased Canadian taxpayer might face a high final-year tax rate on registered accounts; a beneficiary who has a lower income in subsequent years may pay significantly less tax on withdrawals.
Under current US rules, there is a 10-year rule that generally requires the account balance to be fully distributed within 10 years following the account holder’s death. During that period the account can remain tax-deferred in both the US and Canada, which can offer flexibility in planning withdrawals to manage tax efficiency.
US withholding tax
Distributions from US retirement accounts to non-residents are typically subject to a 30% withholding tax. Canadian beneficiaries can often reduce this withholding by submitting Form W-8BEN — the Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding — to the paying financial institution. With the form in place, the US withholding on distributions to Canadian residents is commonly reduced to the 15% treaty rate.
This reduction matters because the Canada Revenue Agency will usually allow a foreign tax credit only up to the treaty rate (15%). If a higher amount is withheld at source, the beneficiary may need to file a US tax return to claim a refund of the excess withholding from the IRS.
Inherited Roth IRAs
A Roth IRA in the US is broadly comparable to a Canadian tax-free savings account (TFSA): qualified distributions are tax-free in the US. A surviving spouse can generally treat a deceased spouse’s Roth IRA as their own or roll it into their own Roth account and continue tax-free treatment.
Roth IRAs are typically tax-free in the United States, and they can also be treated as tax-free in Canada if the account holder files the appropriate election with the Canada Revenue Agency (CRA) and ensures that no new contributions are made that conflict with Canadian registration rules. Non-spouse beneficiaries face the same CRA election requirement but are subject to the 10-year rule for distributions, which limits the period for tax-deferred growth.
When handled correctly, withdrawals from a Roth IRA are tax-free in both countries.
Exceptions
There are important exceptions to the general 10-year rule. Disabled or chronically ill non-spouse beneficiaries may be exempt and can qualify for more favorable distribution options. Minor beneficiaries are another exception: the 10-year clock typically does not begin until the beneficiary reaches the age of majority, allowing the account to remain tax-deferred while the child is a minor.
Summary
US retirement accounts such as IRAs and 401(k)s operate differently from Canadian RRSPs, DC pensions and TFSAs, especially when an account holder dies. For many beneficiaries—spouses and non-spouses alike—the US rules can offer greater flexibility and potential tax advantages compared with how Canadian-registered assets are taxed on death.
If you expect to inherit a US retirement account, or you plan to leave one as an inheritance, it’s important to understand cross-border tax rules, withholding requirements and the election process with the CRA. These rules can influence the timing of withdrawals, the tax rate you pay, and the estate planning choices you make to preserve value for beneficiaries.
Ask a Planner
If you have specific questions about inheriting or leaving US retirement accounts, consider consulting a cross-border tax or estate planning professional who can review your situation and recommend the most tax-efficient strategy.
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