A Canadian Inherits a US IRA or 401(k): The Ten-Year Clock, the Withholding, and Why the Treaty Rate Needs to Be Claimed

The inherited IRA arrives with condolences and a beneficiary form, and the Canadian beneficiary is often the last person the US custodian has dealt with who lives outside the country. What the beneficiary owns: the IRA (or 401(k), which typically can be rolled to an inherited IRA) passes by beneficiary designation outside the estate, and the beneficiary becomes the owner of an inherited account subject to the distribution rules for beneficiaries — for most non-spouse designated beneficiaries of an owner who died after 2019, the entire account must be distributed by the end of the tenth year following the year of death (the ten-year rule), with annual required minimum distributions during the ten years where the deceased had already reached their required beginning date, and with eligible designated beneficiaries (a surviving spouse, a minor child of the owner until majority, a disabled or chronically ill beneficiary, or a beneficiary not more than ten years younger than the owner) retaining the life-expectancy stretch; a surviving spouse may instead treat the account as their own. The US tax on distributions: a Canadian-resident beneficiary who is not a US citizen or green card holder is a nonresident alien, and distributions from the inherited IRA are US-source pension income to them — taxable in the US at 30% by withholding on lump sums, reduced to 15% under the treaty's pension article on periodic payments, exactly as for the original owner's withdrawals (the withholding guide covers the claim); the beneficiary provides the custodian a Form W-8BEN claiming the treaty rate, the custodian withholds at 15% on periodic distributions and issues a Form 1042-S, and the 15% is generally a final US tax with no 1040-NR required (a Form 1040-NR is filed to claim a refund if 30% was withheld on payments that should have qualified, or if the beneficiary has other US filing reasons). A Canadian beneficiary who is a US citizen files a 1040 as always and reports the distributions as pension income at graduated rates, with the withholding as a credit. The Canadian tax: the inheritance itself is not taxed in Canada (no inheritance tax, and the IRA's value is not income to the beneficiary on receipt), but each distribution is pension income to the Canadian-resident beneficiary in the year received — fully taxable at Canadian rates, converted at the distribution-date rate — with a foreign tax credit for the US tax on the distribution (the 15% treaty withholding, fully usable against Canadian tax at the beneficiary's bracket; 30% on a lump sum, partly stranded where it exceeds the Canadian tax on the payment). The estate side: the decedent's US estate tax, if any, is the estate's matter (a US citizen's estate includes the IRA; the exemption covers most), and the beneficiary receives the account without US estate tax at the beneficiary level; there is no basis step-up for an IRA (it is income in respect of a decedent — every dollar distributed is taxable income, which is why the ten-year clock is also a ten-year tax-planning window), and the Canadian deemed-disposition-at-death rules do not apply to a US decedent's US account. Taking the money out efficiently: the ten-year rule leaves the timing to the beneficiary (subject to annual minimums where the decedent had begun RMDs), and the beneficiary's optimization runs in both countries at once — spread the distributions over the ten years in roughly equal periodic amounts (to qualify each as periodic for the 15% treaty rate, to keep the Canadian bracket on each year's inclusion lower than a lump sum would produce, and to keep the US withholding fully creditable), structure the payments as a systematic withdrawal plan the custodian will treat as periodic, front-load or back-load against years of lower Canadian income where the beneficiary's own situation varies (a retirement year, a sabbatical), and coordinate with the beneficiary's own Canadian retirement accounts (an inherited IRA distribution is income that cannot be sheltered by RRSP contributions beyond the beneficiary's own room, and there is no rollover of an inherited IRA into a Canadian plan — the 60(j) route applies to the recipient's own pension plans, not to an inherited account). The custodian problem is the practical obstacle: many US custodians will not open an inherited IRA for a beneficiary with a foreign address, or will force a lump-sum distribution — the beneficiary's first call is to the custodian's beneficiary-services desk (before the estate's executor forces a distribution to close the account), and where the custodian refuses, a transfer of the inherited IRA to a custodian that accepts Canadian-resident beneficiaries preserves the ten-year window rather than collapsing it into one 30%-withheld year. The reporting: the inherited IRA appears on the beneficiary's T1135 as specified foreign property (its cost amount being the value at inheritance), and — for a Canadian-resident beneficiary who is also a US person — on the FBAR and Form 8938 as it would for any US account holder.

Key takeaways

• The ten-year rule governs most non-spouse beneficiaries: the whole account out by the end of the tenth year after death, with annual minimums where the decedent had begun RMDs; spouses and eligible designated beneficiaries keep the life-expectancy stretch.
• US tax follows the nonresident pension rules: 30% withholding on lump sums, 15% under the treaty on periodic payments with a W-8BEN on file, generally final — the beneficiary claims the rate, the custodian applies it.
• Canada taxes each distribution as pension income: fully taxable at Canadian rates in the year received, with a credit for the US tax — the inheritance itself is not taxed; every dollar out is.
• No step-up, no rollover: the IRA is income in respect of a decedent (no basis reset), and an inherited account cannot be rolled into an RRSP — the ten years are a distribution-timing window, not a deferral.
• Spread and structure: roughly equal periodic distributions over the ten years keep the 15% rate, the Canadian bracket, and the credit's usability all working — front- or back-loaded only against the beneficiary's own low-income years.
• The custodian is the obstacle: foreign-address restrictions and forced lump sums collapse the window — call beneficiary services before the executor closes the account, and transfer to an accepting custodian where needed.

The inherited-IRA plan for a Canadian beneficiary

Confirm the account type, the decedent's RMD status, and your beneficiary category (ten-year or stretch). Secure the account: custodian's beneficiary desk, foreign-address policy, inherited-IRA setup or transfer to an accepting custodian. File the W-8BEN with the treaty claim. Design the distribution schedule: equal periodic amounts over the window as the default, adjusted for your own Canadian income by year and for any annual minimums. Report annually: the T1135, the Canadian pension-income inclusion with the credit, and the 1042-S in the file. The plan is a page; the decisions that matter are made in the first sixty days, before a custodian's default converts a ten-year window into a lump sum.

Worked example

A Kelowna resident, Canadian citizen, inherits her Portland aunt's US$420,000 IRA; the aunt had begun RMDs. Category: non-spouse designated beneficiary, more than ten years younger — the ten-year rule, with annual minimums based on the beneficiary's life expectancy during the window. Custodian: the aunt's brokerage declines to hold an inherited IRA for a Canadian address and proposes a full distribution — the beneficiary transfers the inherited IRA (trustee-to-trustee, no distribution) to a custodian that accepts Canadian-resident beneficiaries, preserving the window; a W-8BEN with the Article XVIII claim goes on file. Schedule: about US$42,000 a year for ten years as a systematic quarterly plan — periodic, withheld at 15% (US$6,300 a year), reported on a 1042-S, no 1040-NR. Canada: about C$58,000 of pension income annually at BC rates, the US$6,300 (roughly C$8,600) fully credited — net Canadian tax around C$8,000 a year on the inclusion. Her adjustment: she plans to retire in year four; the schedule is reshaped to take less in her working years and more in the retirement years when her bracket falls — still periodic, still 15%, with the Canadian bracket managed. The lump-sum path the original custodian proposed: US$420,000 distributed in one year, 30% withheld (US$126,000), Canadian tax on a single-year C$580,000 inclusion at the top BC bracket with the 30% US tax partly stranded above the Canadian tax on the payment — roughly C$80,000 more in combined tax than the ten-year schedule, and the entire window lost to a custodian's address policy and an executor's impatience.

Official sources

"The 10-year rule requires the IRA beneficiaries who are not taking life expectancy payments to withdraw the entire balance of the IRA by December 31 of the year containing the 10th anniversary of the owner's death." An eligible designated beneficiary is "the owner's surviving spouse, the owner's minor child, a disabled individual, a chronically ill individual, or any other individual who is not more than 10 years younger than the IRA owner." — Internal Revenue Service, About Publication 590-B, Distributions from Individual Retirement Arrangements, https://www.irs.gov/forms-pubs/about-publication-590-b

"Pensions may also be taxed in the Contracting State in which they arise and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of a periodic pension payment, the tax so charged shall not exceed 15 per cent of the gross amount of such payment." — Canada-United States Tax Convention, Article XVIII(2)(a), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997-2007.html

Practitioner note

An inherited IRA is a ten-year distribution window that a foreign address and an impatient executor can collapse into a single 30%-withheld year, and the first sixty days decide which. Our beneficiary plan secures the account (transferring to an accepting custodian where needed), files the treaty claim, and spreads periodic distributions across the window against the beneficiary's own Canadian brackets — because every dollar is taxable in both countries as it comes out, and the only lever the beneficiary has is when.

See also: For how the RRSP and the 401(k) compare across the border, see how the RRSP and the 401(k) compare across the border; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the inherited-IRA engagement — beneficiary category and RMD-status determination, custodian securing or transfer, the W-8BEN treaty claim, a ten-year periodic distribution schedule shaped to the beneficiary's Canadian income, and T1135 and pension-income reporting with credits. See cross-border pricing or book a call.