Receiving a US IRA Inheritance in Canada

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Inheriting a U.S. IRA can be a meaningful financial event, but if you are living in Canada, it can also become confusing very quickly.

Many beneficiaries find out they have inherited an IRA from a parent, relative, or loved one in the United States, only to be told by the U.S. brokerage firm that the account cannot simply be transferred into a regular Canadian investment account. In many cases, the beneficiary needs to work with a firm and advisor who are properly licensed on both sides of the border.

That is where the planning begins.

At Biscop Cross Border Investment Services, we regularly help Canadians who inherit U.S. retirement accounts understand what they own, how the transfer process works, and what decisions need to be made once the account is in place.

This article focuses on one of the most common situations we see: a Canadian resident inheriting a U.S. IRA.

What is an inherited IRA?

An inherited IRA is an account opened for someone who has been named as the beneficiary of another person’s IRA.

If the original IRA owner passes away and has designated you as the beneficiary, the account does not usually become your own regular IRA. Instead, a new account is opened in your name as an inherited IRA. The account remains connected to the original owner for tax and distribution rule purposes.

For Canadian residents, the key issue is not just understanding what an inherited IRA is. The practical challenge is finding a firm that can actually hold and manage the account for someone living in Canada.

A standard Canadian investment advisor may not be licensed to deal with U.S.-domiciled IRA accounts. A standard U.S. brokerage firm may not be able to service you once they realize you are a Canadian resident. That creates a gap for beneficiaries who are trying to do the right thing, but are not sure where to turn.

Can a Canadian resident keep an inherited IRA?

In many cases, yes.

If you live in Canada and inherit a U.S. IRA, you may be able to transfer the account to an inherited IRA on a U.S. platform that can properly support Canadian residents. The process is usually more mechanical than people expect, provided the right cross-border licensing is in place.

Typically, the beneficiary contacts a cross-border licensed advisor, opens the appropriate inherited IRA account, and then the advisor provides transfer instructions to the U.S. brokerage firm currently holding the deceased person’s IRA.

The important point is that both the firm and the individual advisor need to be able to deal with this type of cross-border account. Without that, the beneficiary may be told to liquidate the account or move assets in a way that may not be ideal. This means that the firm as well as the advisor that you are working with need to be dual securities licensed in Canada and the USA.

Reach out today to discuss your unique situation with a cross-border financial advisor at Biscop Cross Border Investment Services.
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The 10-year rule for inherited IRAs

For many non-spouse beneficiaries, the inherited IRA must generally be fully depleted by the end of the 10th year following the original account owner’s death. The Internal Revenue Service states that when a beneficiary is subject to the 10-year rule, the entire account must be emptied by the end of the 10th year following the year of the account owner’s death.

That does not necessarily mean the account has to be withdrawn immediately.

Depending on the situation, the beneficiary may have flexibility over when withdrawals are taken during the 10-year period. For example, they may withdraw the money evenly over several years, take larger withdrawals in certain years, or wait longer before taking substantial distributions.

However, this is where planning matters.

Withdrawals from a traditional inherited IRA are generally taxable. The IRS notes that beneficiaries must include taxable distributions they receive in gross income.

So, while the account may feel like an inheritance, it is not the same as receiving tax-free cash. If the beneficiary is already in a high tax bracket, taking a large withdrawal in one year could create a significant tax bill.

You may still need annual withdrawals

One of the most common misunderstandings is that the 10-year rule always means you can simply wait until year 10 and withdraw everything then.

That is not always the case.

The distribution rules can depend on factors such as whether the original account owner died before or after their required beginning date for required minimum distributions, as well as the beneficiary’s relationship to the original owner. The IRS lists the original owner’s required beginning date and the beneficiary’s relationship to the owner as factors that affect inherited retirement account distribution requirements.

In some cases, if the original IRA owner had already started taking required minimum distributions, the beneficiary may need to continue taking annual distributions during the 10-year period. This is why it is important not to assume that “10 years” means “do nothing for 10 years.”

Reach out today to discuss your unique situation with a cross-border financial advisor at Biscop Cross Border Investment Services.
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No 10% early withdrawal penalty on inherited IRAs

Another common question is whether younger beneficiaries face the 10% early withdrawal penalty.

With a regular IRA, withdrawals before age 59½ can often trigger a 10% penalty unless an exception applies. But inherited IRAs are different.

If someone inherits an IRA at age 40, they generally do not have to wait until age 59½ to begin taking distributions from that inherited IRA. The withdrawals may still be taxable, but the early withdrawal penalty that normally applies to a personal IRA does not apply in the same way to inherited IRA distributions.

That distinction matters because many beneficiaries assume they are “too young” to touch the account. In reality, the inherited IRA rules usually require the beneficiary to begin thinking about withdrawals well before retirement age.

The account transfer is only the first step

Getting the inherited IRA opened and transferred is important, but it is not the whole job.

Once the account is in place, the bigger question becomes: what should the beneficiary do with it?

The answer depends on the person’s situation.

A beneficiary who inherits a $500,000 IRA and plans to withdraw it over three years may need a very different investment approach than the original owner. If the account is invested heavily in stocks, the beneficiary needs to consider whether that level of market risk still makes sense for their withdrawal timeline.

The original IRA owner may have had a 10, 20, or 30-year investment horizon. The beneficiary may only have a few years before they expect to withdraw the funds. That changes the suitability conversation.

For example, if the inherited IRA is invested entirely in equity markets and the beneficiary plans to use the money within two or three years, a significant market decline could create a real problem. A portfolio that made sense for the person who passed away may not make sense for the person who inherited it.

That is why an inherited IRA should often be treated as a reset point.

The new beneficiary should review:

• How quickly the account needs to be depleted
• Whether annual withdrawals are required
• Their current tax bracket
• Their expected income over the next 10 years
• Their need for cash
• Their investment experience
• Their risk tolerance
• Whether the current investments still match the new timeline

The tax issue is often bigger than the transfer issue

The transfer process can be straightforward when handled by a properly licensed cross-border team. The more important planning issue is often how and when the money comes out.

A beneficiary who takes the full balance in one year may create unnecessary taxable income. A beneficiary who waits too long may be forced into larger withdrawals later. A beneficiary who ignores the account may miss required distributions or end up making investment decisions that do not match their timeline.

The best approach is usually to map the inherited IRA against the beneficiary’s broader financial picture.

For some people, it may make sense to withdraw more in lower-income years. For others, spreading withdrawals over the 10-year period may help manage taxable income. In some cases, a beneficiary may need the money immediately for a house purchase, debt repayment, or other personal priority.

There is no one-size-fits-all answer. The inherited IRA rules create the framework, but the beneficiary’s personal circumstances drive the plan.

Why cross-border licensing matters

This is where Canadian residents face a unique challenge.

If you inherit a U.S. IRA while living in Canada, you need more than a general investment conversation. You need a team that understands the regulatory and practical issues that arise when U.S. retirement assets are held by a Canadian resident.

Many firms are licensed in one country, but not both. That can create problems when a Canadian resident tries to maintain a U.S.-domiciled retirement account.

A cross-border licensed advisor can help coordinate the account opening, transfer instructions, investment review, and withdrawal planning within the proper regulatory structure.

That does not remove the need for tax advice. Beneficiaries should still coordinate with a qualified cross-border tax professional. But from an investment account standpoint, having the right licensing in place can prevent a lot of unnecessary frustration.

Reach out today to discuss your unique situation with a cross-border financial advisor at Biscop Cross Border Investment Services.
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What to do if you inherit a U.S. IRA while living in Canada

If you have inherited a U.S. IRA and you live in Canada, here are the key steps to consider:

1. Confirm that you are the named beneficiaryThe U.S. brokerage firm will need to verify the beneficiary designation and the required estate documentation.
2. Do not rush to liquidate the accountLiquidating the account immediately may not be the best option, especially if it creates a large taxable withdrawal.
3. Find a cross-border licensed advisorYou need a firm and advisor who can properly hold and manage an inherited U.S. IRA for a Canadian resident.
4. Open the inherited IRA correctlyThe account should be opened as an inherited IRA, not treated as a regular personal IRA.
5. Transfer the assetsOnce the inherited IRA is open, transfer instructions can be provided to the firm currently holding the account.
6. Review the withdrawal rulesDetermine whether the 10-year rule applies and whether annual withdrawals are required.
7. Reassess the investmentsThe account should be reviewed based on your timeline, tax situation, investment experience, and risk tolerance.
8. Coordinate tax adviceWithdrawals may be taxable, so cross-border tax advice is important before making major distribution decisions.

Final thoughts

Inheriting a U.S. IRA while living in Canada does not have to be overwhelming, but it does need to be handled properly.

The first step is finding a firm that can actually work with the account. The second step is building a withdrawal and investment plan that fits the beneficiary, not the person who originally owned the IRA.

The 10-year rule, taxable withdrawals, potential annual distribution requirements, and cross-border account restrictions can all affect the outcome. The sooner the beneficiary gets proper guidance, the more control they usually have over the process.

If you live in Canada and have inherited a U.S. IRA, Biscop Cross Border Investment Services can help you understand the account, transfer process, and planning decisions involved.

Reach out today to discuss your unique situation with a cross-border financial advisor at Biscop Cross Border Investment Services.
Book A Cross-Border Consultation

Reach out today to discuss your unique situation with a cross-border financial advisor at Biscop Cross Border Investment Services.

https://www.raymondjames.ca/crossborderinvestmentadvisors/contact-us

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