Traditional and Roth IRAs After Moving to Canada: the Treaty Election, the Canadian Contribution Trap, and How Each Is Taxed

IRAs cross the border with their US character intact and their Canadian character up for determination. The traditional IRA is straightforward: the treaty treats it as a pension, Canadian tax on the internal growth is deferred, and distributions are taxed in Canada as pension income when taken, with US tax on the same distribution reconciled by credit. The Roth IRA is the delicate one. Canada has no native concept of tax-free withdrawals from a retirement account funded with after-tax dollars, so without the treaty a Roth would be a plain taxable account to the CRA — growth taxed annually, the US tax-free withdrawal irrelevant. Article XVIII(7) fixes this by election: the CRA's published position (Folio S5-F3-C1) lets a Canadian resident elect, once, to defer Canadian tax on the Roth's income, which in combination with the treaty's pension provisions preserves the tax-free outcome end to end. The election has a deadline tied to the first resident year's filing due date, one letter per plan, and one absolute rule attached: a Canadian contribution — any contribution made while a Canadian resident — splits the plan, and the portion attributable to post-contribution growth loses the shelter permanently. The single most expensive small mistake an arriving American makes is an automatic $500 monthly Roth contribution that ran three more months after landing.

Key takeaways

• Traditional IRA: pension treatment; no annual Canadian tax on growth; no election needed in practice for employer-plan-style deferral, though filing positions should be consistent; distributions are pension income in Canada (100% inclusion) with US tax credited. RMD timing under US rules continues to apply.
• Roth IRA: file the one-time Article XVIII(7) election letter for each Roth account by the filing due date for the first year of Canadian residency — plan details, balance at residency date, a statement electing deferral. Miss it and the CRA's default is annual taxation of the growth.
• The Canadian contribution trap: contributions (including rollovers from non-Roth accounts, i.e., conversions) made while Canadian-resident create a taxable sub-account — Canadian tax annually on the growth attributable to the tainted portion, forever. Stop all Roth contributions and conversions before the residency date.
• No new IRA funding generally makes sense anyway: contributions require US compensation; an American earning Canadian wages excluded or credited on the US side usually has no useful room, and Roth conversions after the move are both US-taxable and trap-triggering.
• Withdrawals: qualified Roth withdrawals are tax-free in the US and, with the election in place, not taxed by Canada; traditional IRA withdrawals land at Canadian rates. This ordering makes the Roth the last-money-out account for a Canadian-resident retiree.
• Reporting: IRAs are generally excluded from T1135; FBAR treatment for IRAs differs from employer plans; keep the election letters and residency-date valuations in the permanent file.

Pre-move sequencing

The IRA to-do list belongs in the weeks before the residency date: stop automatic contributions; complete any planned Roth conversion (US tax at pre-move rates, no Canadian involvement, no taint); take any distribution that is better taken while Canada has no claim; and confirm the custodian will keep serving a Canadian address — moving custodians after the move, mid-election, is doable but messier.

Worked example

A couple moves from Seattle to Halifax on June 1. He has a US$300,000 traditional IRA; she has a US$150,000 Roth with a $458 automatic monthly contribution. Pre-move: they stop her contributions in April; he converts US$40,000 of his traditional IRA to Roth in May — taxed on the US return only, at a year whose income is low because Canadian employment hasn't started. Post-move: each files the Article XVIII(7) election letter for the Roth accounts with the first Canadian returns; his traditional IRA needs no election to keep deferring. Twenty years later in Nova Scotia: his traditional IRA withdrawals are pension income at Canadian rates with US credits; her Roth withdrawals — election on file, no Canadian contributions ever — come out tax-free in both countries. The counterfactual worth stating: had her $458 contributions run through August, the Roth would carry a tainted slice growing alongside the clean one, with an annual Canadian tax computation splitting the account — a permanent bookkeeping tax on a three-month oversight.

Official sources

Income Tax Folio S5-F3-C1 sets out the CRA's views on Roth IRAs. The Article XVIII(7) election "should be filed on or before the individual's filing-due date for the tax year in which the individual became resident in Canada," made "in the form of a letter" (one per Roth IRA); a "Canadian Contribution" causes "part of the Roth IRA [to] cease to be considered a pension," and income accruing after it ceases to benefit from the deferral. — 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

Article XVIII(7) provides that a beneficiary of a plan "operated exclusively to provide pension or employee benefits may elect... to defer taxation... with respect to any income accrued in the plan but not distributed... until such time as and to the extent that a distribution is made" — the basis on which Canadian residents defer US tax on plans such as Roth IRAs. — Canada-United States Tax Convention, Article XVIII(7), https://www.canada.ca/en/department-finance/programs/tax-policy/tax-treaties/country/united-states-america-convention-consolidated-1980-1983-1984-1995-1997.html

Practitioner note

Roth elections are the smallest form with the biggest cliff in cross-border retirement work: one letter, one deadline, one rule about contributions, and no repair kit if the rule is broken. Our pre-move checklist puts the Roth items in red — stop contributions now, convert before the date if converting at all, file the letter with year one — because everything else about IRAs in Canada is forgiving and this one thing is not.

See also: how your cost basis steps up on arrival; and browse every cross-border tax topic guide, organized by situation.

Next step

Fairlight prepares the IRA transition — the treaty election letters, the pre-move conversion and contribution stop, and the two-country withdrawal plan for retirement. See cross-border pricing or book a call.