American In Canada - Am I Messing Up My Financial Future?

[laxstache]

Howdy all,

Long time mustachian lurker - first time poster.

I am a 25 year old American currently living in Canada. I have no concept of the tax implications of my current financial scenario and wanted to ask the mustachian community what I could be doing better.


US Finances

- 18k in cash in a savings account
- 8500 in a vanguard roth IRA with a $600 monthly contribution

I have a side business that I run a sole proprietorship out of the United States that generates approximately 15-20k of income per year. Last year I filed this income under a 1040EZ form entirely separate from my Canadian taxes. I plan to register the business as an LLC in 2019 as it continues to grow.



Paypal

- Approximately $3300... I know this money would be better served in the ROTH IRA, but I use it for invoicing and other business expenses for the time being.



Canadian Finances

- 24k in a canadian savings account
- 8600 in a TFSA with a $100/week contribution

I work in Canada full time and my day job provides me with $1320 after tax every two weeks. I am also expecting a large tax return this year & next due to education tax credits.


Am I wrong to continue putting money into a Canadian TFSA if I don't plan on living in Canada forever? Would I be better off transferring the money I'm earning in Canada into my US account intermittently to boost how much money I can put into my ROTH IRA? Is there something else I should be doing when I am filing my taxes in the US and Canada?

Sorry for the million questions - I just feel a bit lost here.

Thanks in advance :)

[thriftyc]

TFSA is likely not a good idea.  As a US person you have to file taxes with the IRS every year on your worldwide income.  US gov does not recognize TFSA's as a tax shelter.  They recognize RRSP's, but not TFSA's.  You will be taxed on the growth of your TFSA, plus have to file complex paperwork for it.

[elaine amj]

Yep.

As an American, do NOT use TFSA or even RESP (education plans) as they are apparently very complicated to report on US taxes. Not worth it. RRSPs are OK though and are covered through treaties with Social Security.

Be careful to file all the correct paperwork to the IRS and you shouldn't be dinged tax-wise unless you start earning a lot of income.

[laxstache]

Okay, this is great information. Thank you!

So given that I shouldn't be using a TFSA what is the best move for now? Should I close my TFSA in Canada and keep all my Canadian money in my Canadian account? Or should I gradually convert my Canadian earnings to USD to pour as much as possible into my Roth IRA?

[elaine amj]

Hmm...not too sure if your best bet is to use your Roth IRA. My take on it is that it would be the least complicated thing for you to do. Plus MERs are typically cheaper for US investments. But smarter folks may be able to give you better advice :)

As for the TFSA, we closed out the TFSA ASAP upon recommendation from our US/Cdn tax accountant. Did not want to take any chances dealing with the IRS.

Okay, this is great information. Thank you!

So given that I shouldn't be using a TFSA what is the best move for now? Should I close my TFSA in Canada and keep all my Canadian money in my Canadian account? Or should I gradually convert my Canadian earnings to USD to pour as much as possible into my Roth IRA?

[RichMoose]

At your income level you are likely best to go with a non-registered investment account, invest for high tax efficiency, and pay the little taxes you will need to pay.

Once you earn more, or if you've confirmed your plans regarding moving elsewhere, you could examine other options.

[laxstache]

Alright, I will be closing my TFSA today. Thanks for all your help!

[Goldielocks]

Use non-registered or a Canadian RRSP.

Actually, move your TFSA to a Canadian RRSP.  It is like an IRA ... EXCEPT -- you can withdraw your money at any time without aq 10% penalty, even before age 55.  The only penalty is taxes, but you avoided taxes when you used it at first, so you are still only paying once, when you withdraw.

You can also roll over your RRSP to a US IRA if you move back to the USA in future... I believe (but double check!)  I was able to roll my IRA into my RRSP and these things usually work both ways in the tax treaties...

[mathman]

As an US Citizen, you may hear and read horror stories about the TFSA.  However, there is no IRS ruling (yet) as to whether the TFSA is a trust (and therefore requiring complex paperwork).  Check out Max Reed's books and articles as he and the folks at SKL seem to have the best understanding of the IRS rules.  I still suggest prioritizing RRSP over TFSA because it is simpler and you get the tax deductions now. Statistically, this will ultimately lead to higher returns.  Note: RESPs are definitely trusts in the eye of the IRS and require complicated paperwork. There is not yet any ruling on the TFSA.

Unlike the TFSA, the Roth IRA problem is not a grey area and you could really have a problem with CRA.  The Canadian government does not recognize this type of account - it only recognizes 401(k)/403(b)/equiv and traditional IRAs.  Technically, the minute you make a "Canadian contribution" to a Roth IRA, the entire account appears as a taxable/unregistered account in the eyes of the CRA.  I suggest reading about Canadian contributions and the status.   For newcomers to Canada who already have Roth IRAs in the States before immigrating to Canada, such people must declare in the first year the existence (and location, value, account numbers...) of this account to a special office at the CRA.  This declaration keeps the Roth IRA tax free in the eyes of the CRA. But once you are in Canada you should never ever contribute to it again, otherwise the CRA deems the entire thing as taxable.