# Reconsidering TFSA for Americans living in Canada



## thrashertm (Nov 12, 2009)

Greetings all,
Conventional wisdom is that Americans shouldn't open a TFSA account due to fact that the US IRS doesn't yet recognize them as retirement accounts and the onerous reporting requirements.

However, since the US recognizes RRSPs I am wondering if a TFSA would make sense assuming:

1. The USA IRS will recognize TFSAs as tax deferred accounts similar to IRA some-day
2. If #1 – there may a mechanism to recover the taxes paid to the US on interest and dividends
3. Americans in Canada could renounce US citizenship, thus freeing themselves from the US tax obligation

If the TFSA still isn't advisable and the RRSP is maxed out, what's the next best option for a self-directed brokerage/retirement account - US or Canadian account? 

Thanks!


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## Nononymous (Jul 12, 2011)

If partial compliance is your thing, TFSAs are apparently not reported to the US under FATCA, so you could open one and not report it.


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## thrashertm (Nov 12, 2009)

Nononymous said:


> If partial compliance is your thing, TFSAs are apparently not reported to the US under FATCA, so you could open one and not report it.


I'd like to stay in compliance. Thanks


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## BBCWatcher (Dec 28, 2012)

You could also max out your U.S. tax-advantaged retirement account(s), e.g. the Roth IRA. That would tend to make a lot of sense for a U.S. person, to grab the "home field" play, as it were. There is a fair bit of wisdom in playing both/all sides. Bear in mind there's no such thing as a truly globally tax-advantaged account. However, since most people cannot fully predict the future, there's merit in diversification, including tax diversification. If you happen to end up retiring in a country (and/or in a set of circumstances) that's tax-hostile to Tax Advantaged Account A but tax-friendly to Tax Advantaged Account B, then you'd presumably draw from the latter. Or vice versa, as applicable. There's also the fact a particular country can yank or modify tax policies any time they wish.

There's another thread (or three) discussing TFSAs. I'd just point out that you have to go dig into the U.S.-Canada tax treaty to get the real answer(s) about that type of account. I've explained my reasoning before, and I won't repeat it here. Suffice it to say the U.S. reporting requirements may have gotten less onerous. (I don't think they were particularly onerous to begin with, but opinions vary.)


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## thrashertm (Nov 12, 2009)

BBCWatcher said:


> You could also max out your U.S. tax-advantaged retirement account(s), e.g. the Roth IRA. That would tend to make a lot of sense for a U.S. person, to grab the "home field" play, as it were. There is a fair bit of wisdom in playing both/all sides. Bear in mind there's no such thing as a truly globally tax-advantaged account. However, since most people cannot fully predict the future, there's merit in diversification, including tax diversification. If you happen to end up retiring in a country (and/or in a set of circumstances) that's tax-hostile to Tax Advantaged Account A but tax-friendly to Tax Advantaged Account B, then you'd presumably draw from the latter. Or vice versa, as applicable. There's also the fact a particular country can yank or modify tax policies any time they wish.
> 
> There's another thread (or three) discussing TFSAs. I'd just point out that you have to go dig into the U.S.-Canada tax treaty to get the real answer(s) about that type of account. I've explained my reasoning before, and I won't repeat it here. Suffice it to say the U.S. reporting requirements may have gotten less onerous. (I don't think they were particularly onerous to begin with, but opinions vary.)


Can a US citizen invest in an IRA if living outside the US and all income is non-US derived?


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## Bevdeforges (Nov 16, 2007)

thrashertm said:


> Can a US citizen invest in an IRA if living outside the US and all income is non-US derived?


To invest in an IRA, you must have earned income (i.e. salary, self-employment or similar) that is taxable in the US. Basically means that if you take the FEIE to exclude your earned income then, no, you can't contribute to an IRA (or most other tax deferred retirement accounts).

If your non-US income is so called passive income, then no, you can't set up an IRA.

One other consideration: if you are resident outside the US, or plan to be by the time you start making withdrawals from an IRA, consider both your exchange rate risk and do look into how your country of residence may handle a "foreign" account like this for tax purposes. There may also be issues involving how your country of residence would handle inheritance taxes of an IRA or other foreign account.
Cheers,
Bev


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## BBCWatcher (Dec 28, 2012)

Bevdeforges said:


> Basically means that if you take the FEIE to exclude your earned income then, no, you can't contribute to an IRA (or most other tax deferred retirement accounts).


Important point: That's not quite the same as saying that if you take the Foreign Earned Income Exclusion (FEIE) that you cannot contribute to an IRA. If you have earned income _above_ the FEIE/Foreign Housing Exclusion then you can still contribute (at least to a non-deductible Traditional IRA, plus any rollovers). If you have earned income _beside_ the FEIE/FHE -- for example, some earned income from the U.S. or from the U.S. government overseas that cannot be excluded, perhaps in your first or last year overseas -- then that's OK, too.

I've seen some tax advisors suggest you can take a "partial" FEIE. For example, if you had $50,000 of earned income you'd exclude, say, only $42,000 of it using the FEIE (if eligible) then you'd have $8,000 non-excluded -- and make your IRA contributions, qualify for refundable tax credits, etc. I do not agree with this advice. It appears to be contrary to the instructions and rules.


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