IRA and Roth IRA Contributions for Americans in Canada: Why the FEIE Blocks Them and Why the Roth Gets Tainted

An American living in Canada can contribute to a traditional or Roth IRA only if they have taxable compensation for the year that has not been excluded under the foreign earned income exclusion. Most Americans in Canada who claim the FEIE have none, and their IRA contribution room is zero. Those who use the foreign tax credit instead have compensation and can contribute, but a Roth IRA contribution made while a Canadian resident is a Canadian contribution that ends the treaty election protecting the Roth from Canadian tax. For most Americans in Canada, the RRSP is the retirement account that works on both sides.

Key takeaways

• IRA eligibility requires taxable compensation (wages, self-employment income) at least equal to the contribution ($7,500 in 2026, plus $1,100 catch-up at 50). Compensation excluded under the FEIE does not count; an American who excludes all their Canadian salary has no room.
• Traditional IRA: the contribution is deductible in the US (subject to income limits if covered by an employer plan) but not deductible in Canada; the earnings are tax-deferred in the US and, under Article XVIII of the treaty, in Canada; withdrawals are taxable in both with a credit.
• Roth IRA: contributions are not deductible anywhere. Under Article XVIII(7), a Canadian resident can elect to defer Canadian tax on the Roth's income, but any contribution made while a Canadian resident is a Canadian contribution: the portion of the Roth attributable to it loses the election, and its income becomes taxable in Canada annually.
• RRSP: deductible in Canada; the earnings are deferred in the US under the treaty; a US citizen's contributions are not deductible in the US except employer plan contributions under Article XVIII(8) in limited cases. The RRSP is the account that works.
• Rollovers: a 401(k) or IRA can be rolled to an RRSP under section 60(j) of the Canadian Act; the US taxes the withdrawal and Canada gives a deduction for the RRSP contribution, with a foreign tax credit for the US tax.

The compensation rule

IRA contributions are limited to taxable compensation. For an American in Canada who claims the FEIE, the excluded salary is not taxable compensation, and if all their earned income is excluded, they cannot contribute to any IRA. This is one of the less obvious costs of the FEIE. An American who claims the foreign tax credit instead has full taxable compensation and can contribute up to the limit, and the contribution is deductible for a traditional IRA if the taxpayer is not covered by an employer retirement plan (an RRSP or Canadian RPP may count as coverage for this purpose, which subjects the deduction to the income phase-out).

The traditional IRA in Canada

A traditional IRA held by a Canadian resident is a pension for treaty purposes. Canada defers tax on the income until withdrawal under Article XVIII; the US defers under domestic law. Withdrawals are taxable in the US (with 30% withholding for a non-resident, reduced to 15% for periodic payments under the treaty; a US citizen is taxed on the 1040) and in Canada as pension income with a foreign tax credit. The contribution deduction on the US side has no Canadian equivalent, so a US-deductible IRA contribution reduces US tax that the foreign tax credit would have eliminated anyway for most Americans in Canada. The benefit is modest.

The Roth IRA in Canada

The Roth is the account that goes wrong. Under Article XVIII(7), a Canadian resident who holds a Roth IRA can elect (on a filing with the CRA for the first year of Canadian residence) to defer Canadian tax on the Roth's income; with the election, the Roth remains tax-free in Canada as it is in the US. The CRA's position (Folio S5-F3-C1) is that a contribution made while the holder is a Canadian resident is a Canadian contribution: the Roth is then treated as two accounts, one protected by the election and one not, and the income attributable to the Canadian contributions is taxable in Canada annually. The election, once broken by a Canadian contribution, cannot be restored for that portion.

The practical rule: an American moving to Canada with a Roth files the election in the first year and makes no further contributions. An American who wants to save for retirement while in Canada uses an RRSP.

The RRSP for an American in Canada

Contributions are deductible in Canada. The US does not allow a deduction for contributions to a Canadian RRSP (except for contributions to an employer-sponsored plan under Article XVIII(8), where the US resident works for a Canadian employer and meets conditions; this rarely applies to a US citizen resident in Canada). The earnings are deferred in the US under Article XVIII and the automatic deferral for eligible individuals. Withdrawals are taxable in Canada and in the US, with the US allowing recovery of basis (contributions that were not US-deductible) tax-free and a foreign tax credit for the Canadian tax on the rest. The RRSP is reported on the FBAR and Form 8938.

The Canadian deduction is worth more than a US IRA deduction for an American in Canada, because Canadian tax is the binding tax.

Rollovers into Canada

An American moving to Canada with a 401(k) or IRA can leave it in place (taxable in both countries on withdrawal with a credit) or roll it to an RRSP under section 60(j): the US taxes the lump-sum withdrawal (30% withholding, or the 1040 rate for a citizen, plus the 10% early withdrawal penalty if under 59½), Canada includes the withdrawal in income and allows an offsetting RRSP deduction (no contribution room required), and the US tax is a foreign tax credit against Canadian tax on the withdrawal, which after the deduction is zero, so the credit is lost unless there is other Canadian tax on US-source income. The rollover usually costs the US tax outright; leaving the plan in place is usually better.

Worked example

A US citizen moves to Toronto with a $150,000 Roth IRA and takes a $140,000 CAD job, claiming the foreign tax credit.

• Roth. Article XVIII(7) election filed with the first T1. No further contributions. The Roth stays tax-free in both countries.
• IRA. She has taxable compensation (FTC, not FEIE) and could contribute $7,500 to a traditional IRA; the US deduction saves little because the FTC already eliminates her US tax; the contribution is not deductible in Canada. She declines.
• RRSP. She contributes $25,000 CAD to an RRSP: deductible in Canada (saving about $11,000 at her marginal rate); deferred in the US under the treaty; on the FBAR and Form 8938.
• Had she claimed the FEIE. No IRA room at all; the RRSP still works.

Official sources

"You can open and make contributions to a traditional IRA if you (or, if you file a joint return, your spouse) received taxable compensation during the year." Amounts excluded from income, "such as foreign earned income and housing costs," are not treated as compensation for this purpose. — Internal Revenue Service, Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), https://www.irs.gov/publications/p590a

"In general, an individual resident in Canada who owns a Roth IRA should file the election and avoid making any contributions to the Roth IRA after they have become resident." — Canada Revenue Agency, Income Tax Folio S5-F3-C1, Taxation of a Roth IRA, https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-5-international-residency/folio-3-cross-border-issues/income-tax-folio-s5-f3-c1-taxation-roth-ira.html

Practitioner note

Americans in Canada bring the Roth question to every first meeting, and the answer is the same: file the treaty election, stop contributing, and use the RRSP. A Roth contribution made in Canada breaks the election on that portion permanently, and the IRA deduction is worth almost nothing to someone whose US tax is already zero after the foreign tax credit.

See also: Planning a move? Start with the Canada-to-US tax checklist and browse every corridor by city, province, and state.

Next step

Fairlight prepares the Article XVIII(7) Roth election with the first Canadian return, the RRSP and IRA planning, and the annual returns for Americans in Canada. See cross-border pricing or book a call.