Author Topic: Early retirement in Canada/US  (Read 3162 times)

casanova

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Early retirement in Canada/US
« on: August 16, 2016, 02:22:01 PM »
Hi all,

I will be starting my first real job on Monday and because I am a Mustachian-at-heart my natural inclination lately has been to figure out when I can retire. I surfed all over the web and was very happy to find this blog. Most of all because it approaches the question from what I believe is the right angle: controlling your expenses by simplifying your life. As opposed to most of the mainstream sites that suggest increasing your income to satisfy a wasteful lifestyle. Anyways, you know all of this...

I have a very specific question though that I am hoping to get some advice on. I am a Canadian but I will be starting my career (on Monday) in the US. I think I can retire in under 10 years but I am not sure about where I want to retire. Back in Canada? Or in the US (but near the border to be close to family)? I've started reading a bit about the penalties associated with moving retirement money but most articles are geared towards the usual age ~ 65... So here is my question:

What is the most flexible savings strategy for early retirement in either Canada or US?

Merci!

Trudie

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Re: Early retirement in Canada/US
« Reply #1 on: August 16, 2016, 02:26:22 PM »
I cannot speak to investment strategies or how things will specifically work out for you on that front.  There are others here that can specifically answer that for you better than I.

However, I give my vote to Canada if, for no other reason, health care.  Canadian Medicare gives you a health care guarantee at any age.  While Obama Care has improved the situation for U.S. residents, it is constantly under attack and just today stories were published about another major health insurer (Aetna) pulling out of the exchange.

In general, I think Canada provides a much better safety net for the unexpected.

Goldielocks

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Re: Early retirement in Canada/US
« Reply #2 on: August 16, 2016, 06:11:58 PM »
Something to think about.

Social Security versus Canada Pension


Social Security is quite expensive 2.5x Canada's in the USA, but you also get double the benefits upon retirement.  However, it is less secure than Canada's Pension Plan + Old Age Security.

So -- are you (and employer) going to pay for US Social Security, or is your work status "Intent to return to Canada" where you can NOT pay US Social Security?   I assume you have the typical visa  and will pay Social Security.

So -- considerations

If you plan to work for less than 10 years in the USA, but will be paying Social Security on the USA side, then you will get "credits" for contributions that translate / convert to Canada Pension plan, but at 1/2 the value or less.  BURN!     

If you manage to earn 40 credits (10 years full time) of Social Security in the USA, then you will get paid by US Social Security during your retirement, your entitled amount.  Even if you return to Canada. 

Where to retire


You will want to figure out where to retire before transferring any investments between countries.  It is best, I have found to keep 60% or more of your retirement investments in the currency in which you plan to reside.

Estate (death) taxes

USA has estate taxes, over a minimum estate value, and Canada has smaller probate fees.  If you plan to be very rich and leave money to heirs, you may wish to not be in the USA.

Retirement Taxes
Retirement income for FIRE will likely be less than during working career, so your retirement taxes in canada will be quite low, but your social benefits, espeically in Quebec will be very high.

in the US -- your working career taxes will likely net out lower than in Canada.

Retirement Plans

401k's and IRA's are a bit nasty, as they are locked in retirement accounts with limted ways to convert them slowly to Roth IRAs...  RRSP are highly flexible, and allow you to access your money as needed, only paying the deferred taxes.  This is a great way to manage your lifetime income tax and is a large benefit to Canada's system if you plan to retire before 60.

Some random thoughts.  I hope this helps.

casanova

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Re: Early retirement in Canada/US
« Reply #3 on: August 17, 2016, 10:38:16 AM »
Wow that is a lot to soak in... Thanks for the great reply! So let me get this straight,

If I decide to retire in the US this is what it would look like:
- I would save up to the limits in the 401k and IRA accounts
- Then I'd look at other investment options like rental property
- I would apply for a green card (right now I'm coming in on a H1b) and give up ties to Canada
- In about 7 years when I 'retire' I would do the 5-year ladder thing with the 401k account
- I would get 1/2 social security (if it's still solvent) because my carreer would only span 7 years of full time employment in the US
- I would have to worry about medicare and other things that otherwise would be taken care of in Canada
- When I die I would leave about $600k behind which would be subject to estate tax... How much estate tax?

If I decide to retire to Canada it's a little bit unclear:
- I would invest my money in Canadian $ funds... Is this possible?
- I would invest my money in RRSPs... Is this possible?
- Or I would invest just as the first scenario but then convert my 401k to RRSPs when I retire back to Canada... Is this possible?
- I would keep my US rental properties and continue to receive the income while in Canada... Is this possible?
- I would be able to access my RRSPs early without any penalties or hoops to jump through
- My social security would convert to 1/2 a Canadian pension
- Lots of benefits in Canada especially Quebec (where I'm from)
- My children would pay lower estate taxes when I die

Please correct me where I am wrong :)

Goldielocks

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Re: Early retirement in Canada/US
« Reply #4 on: August 17, 2016, 05:09:46 PM »
Wow that is a lot to soak in... Thanks for the great reply! So let me get this straight,

If I decide to retire in the US this is what it would look like:
- I would save up to the limits in the 401k and IRA accounts
Always a good plan, especially to save at least the match.  Also look at ROTH and converting from 401k to Roth in lower income years.

- Then I'd look at other investment options like rental property
Or just investing outside of registered funds....   for property, you may as well buy a home and get the tax credit on it once you have permanent status in the USA and can't be forced out.
- I would apply for a green card (right now I'm coming in on a H1b) and give up ties to Canada..  Yep.
IF you retire to US, then greencard is the best way, IMO.  Others may disagree.

- In about 7 years when I 'retire' I would do the 5-year ladder thing with the 401k account  Yep, or there may be other ways even before then if you have lower income years.
- I would get 1/2 social security (if it's still solvent) because my carreer would only span 7 years of full time employment in the US.. Nope,  you would get the Social security that you have paid into and earned with the 28 credits...   I don't have the calculator, but you can surely google it.  This is like everyone else in the USA with only 7 years.  You would also get some credit for Canada Pension (or be paid by Canada Pension) if you have enough credits already, before your move.
- I would have to worry about medicare and other things that otherwise would be taken care of in Canada.  Yep,  but remember you would have to worry about Rx and dental and Vision and Physio and hearing aids and wheelchairs and other care costs in Canada, too.  These are less than medical, but not insubstantial and you get tax credits for medical costs in both countries..
- When I die I would leave about $600k behind which would be subject to estate tax... How much estate tax?  Depends on the year and the amount.   IT changes all the time in the USA.Right now the exemption is very high and 600k would be zero

If I decide to retire to Canada it's a little bit unclear:
- I would invest my money in Canadian $ funds... Is this possible?  Should be able to invest in any world currency with most brokerage accounts in the USA
- I would invest my money in RRSPs... Is this possible?   Not from USA, RRSPs are not recognized in USA, and you canadian income to invest in them anyway.
- Or I would invest just as the first scenario but then convert my 401k to RRSPs when I retire back to Canada... Is this possible?  YES,  i just did that.  you need to time it to ensure you are paying enough taxes in the year you do it, to recoup the foreign taxes paid to the usa.

For all those americans out there,  here is another way to get your 401k money before 59.5 and get the penalty back....  Move to Canada, and transfer your IRA's to your RRSP's in a high (canadian) income year.   Your 10% penalty is considered foriegn taxes paid, and you reduce your other taxes dollar for dollar.  Likewise the 15% withholding by the brokerage.   The income reported and penalty and taxes paid to IRS by emptying your IRA is offset by the Canadian tax deduction for moving the money into your RRSP.  There is a limit on RRSP rollover, but it is very high.
- I would keep my US rental properties and continue to receive the income while in Canada... Is this possible?
YEs,  need to file two tax returns, but yes
- I would be able to access my RRSPs early without any penalties or hoops to jump through.
YES,  once in Canada...   I have not looked into it from the USA side...  I imagine it is reported as Foreign pension income if you are resident in USA.-->  others can coment?.
- My social security would convert to 1/2 a Canadian pension..  Not directly... that is not how either pension system works...   Everyone earns credits as they pay into the system while working, and the amount you get out is proportional to the number of credits you earned, subject to a minimum and to current payout rates.   Your credits earned in the Social Security, if you don't have 40 credits or more (10 years) in the USA system, transfer as time credits to the Canadian system.  However 1 credit in canada pension plan is only worth 1/2 the $$;s of the USA plan.  This is because it is actually due to tax treaty agreement, not due to a transfer of money from USA to Canada...  and Canadians pay far less per credit to earn them while working  (maxes out at a much lower annual amount) so get less in retirement.
- Lots of benefits in Canada especially Quebec (where I'm from).  Yep.   I bet quite a few subsidized recreational seniors programs, housing, long term care, activities, reduced cost utilities / transit, etc exist.  There are for young families, so why not seniors?
- My children would pay lower estate taxes when I die.  There are zero estate taxes in Canada.  Probate fees in qc max out at a $65 filing fee, it appears..AB at $400, but BC and Ontario are 1.4% of the probated estate.  Good thing the majority of one's assets can be assigned to bypass probate in an number of ways (but many are not tax efficient).  Property not held jointly is the number one area for probate..

Please correct me where I am wrong :)

Freedomin5

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Re: Early retirement in Canada/US
« Reply #5 on: August 17, 2016, 06:48:08 PM »
Can't answer all your questions, but as a canadian expat, here are my two cents...

You can invest in canadian $ funds. If you want, another option is to set up an investment account the next time you're in Canada, and convert and transfer your US dollars over.

You can invest in RRSPs as long as you continue to declare and pay income tax in Canada on your US salary. If you declare non-residency for tax purposes, then my understanding is that you cannot contribute to RRSPs.

I think Andrew Hallam has quite a bit of info for Canadian expats (andrewhallam.com).

casanova

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Re: Early retirement in Canada/US
« Reply #6 on: August 18, 2016, 08:55:40 AM »
What an incredible wealth of information!
Thank you goldielocks and Freedomin5!

Let me go through a few points here to digest:

- My employer contributes an extra 15% to the 401k, no match required. My idea of contributing was to reduce my taxable income. In my case I think I can contribute 18k for 401k + 5.5k for IRA + 5.5k for my wife (not employed) for a total of ~ 30k per year. Rolling over to the Roth IRA would happen I suppose when I am in my early retirement years with low income.

- A big part of my plan is to buy a split house within the next year and to rent out one part of it. That means buying the house before getting the green card. I know this involves a certain risk. There are no guarantees in life but my employment situation should be quite stable for at least 6 years at which point my contract will be reevaluated. In a worst case scenario where I suddenly lose the job and have to leave the US, would I be able to hold on to the house and just rent out both units?

- For retiring to Canada I guess the smoothest transition then would be to look for a job transfer back to Canada a year or two before retiring. This would give me a couple of years of high income in which to do the 401k/RRSP conversion. Can you elaborate on the penalties? If I understand right, 10% is held back by US, and the additional 15% is basically like a deduction at source which could come back at tax time. Correct?

So for example if I had saved 500k and transferred that over to the RRSP. There would be a 50k penalty and a 75k withheld. If my annual taxes are around 25k how much of this would I recoup? Only 25k? Or 25k + the 75k withheld? Can the conversion be spread out over a few years so that I can recoup 25k each year?

- In both plans (retiring to US v. Canada) I am contributing to the 401k and IRA, and I am buying a house to live and rent. On these points it seems that no decision really needs to be made until the last couple years of my career where I can be positioning things. The short-term decisions would then be: I should invest most of my funds in Canadian $ if that I'm leaning towards Canada - Or I should apply for the green card ASAP if I am leaning towards US. Have I got that right?

- At what age does the pension become available? And how much is it worth? I ask out of curiosity because my plan doesn't depend on it. It would basically be a safety or insurance policy.

Thanks :)

Goldielocks

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Re: Early retirement in Canada/US
« Reply #7 on: August 18, 2016, 03:22:47 PM »
401k:  The question to ask yourself is why do you want to reduce your taxable income now?   The best answer is that you plan to pay less taxes in retirement than now.  To come out ahead, you need to take your tax rebate $ and put them into your 401k.  Which many people don't do.

 If this is not the reason, you may be better off to use your cash to pay off debt, and borrow to invest in non-registered funds, getting the tax deduction on your borrowing, (or your landlord investment idea).

House ownership -- foreigners can own and rent property in the USA.  Just file all your tax forms needed.

Your penalties stated are correct, but watch out, as some Brokerages in the usa do not stick to the 15% withholding, and try to holdback a lot more.   The low 15% is only due to the tax treaty with Canada, and some banks want to be extra conservative because they are on the hook if they get it wrong.   (Wells Fargo, I am growling at you).  To get the overage back, you need to file with the IRS that year and wait.

Getting the money back.
  :   So for example if I had saved 500k and transferred that over to the RRSP. There would be a 50k penalty and a 75k withheld. If my annual taxes are around 25k how much of this would I recoup? Only 25k? Or 25k + the 75k withheld?

This needs to be a "one time" rollover, not several amounts, and many brokerages want to close out non-resident IRAS, anyway.

Ignoring exchange rates:
Step 1: Withdraw 500k from IRA.   Receive 375k.  (amount minus penalty and withholding)
Step 2:  Put 500k into RRSP same year.  (find the money to top it up from somewhere)
Step 3:  Complete your Canada Income tax form after year end.   
-Your income is now (income before+500k)  and your RRSP deduction is 500k.  Pay net zero taxes to canada on the rollover.
-Your canadian taxes from (income - RRSP contribution) are $25k  (per your example)
- you have foreign taxes paid of $125k.
- you subtract $125k as taxes already paid from $25k taxes calculated and pay zero...  Sorry no more money for you!  No credits   Actually,  the calculation is not quite this simple, and involves ratios, so it could be less...  Leave a large buffer of taxes owing in canada in the year you want to rollover funds.

Step 4:  Calculate AMT
Because you have a very high income with the +500k, but low taxes, you must calculate AMT, and may still have to pay taxes.  Those taxes can be claimed back in future 3(?) years if you do not have AMT again, but only up to the amount in AMT paid.  Essentially AMT is just a hassle, as if you continue to have income, you will get the money back.

Step 5:  Receive your notice of assessment in June.
Find out that there was a maximum on the RRSP rollover of some amount.. which can not be found in any CCRA documents..  (I forget, about $275k?)...  so the extra is now overfunding your RRSP, and you need to deal with the mess thus created and maybe have more taxes ..

Morale -- talk to a cross border tax accountant before you do this move.


Can the conversion be spread out over a few years so that I can recoup 25k each year?the amount you withdraw  NOPE, this is not AMT.  it is a one year only deal.

Green card  If you are planning to buy property in USA, I highly recommend applying for a greencard as soon as possible.  It can take several years.   In the meantime, if you employer says to you that "sorry, the job only pays $60k now, and is located in Denver"  you have no choice but to accept it and relocate, or move back to Canada within 30 days of end of employment (or find another employer to sponsor you within 30 days).

Other

The only other decision may be to limit the total amount in the IRA / 401k accounts to the maximum that can be rolled over into the RRSP.  Remaining amounts then are invested in ROTH and non-registered, to make it easier for you.

CAUTION
Note that the tax guidelines for canada / usa and how to apply taxes on pension funds do change.   For example, Before 2010, you could not claim back the 10% 401k penalty, upon a rollover, but you can now.  Wells Fargo allowed me to invest and trade on my IRA even while non-resident for 3 years, then suddenly froze all my accounts...

Who knows what the future will bring?

As for Canadian $'s versus US$'s... It only really matters when you are within 10 years of using the money.

IMO, in the last 5 years of being in the USA, if you know that you are moving back, then you start looking for jumps in the exchange rate, and start converting a portion of your money back.  Note, you can not roll over us$ directly into an RRSP, but you can buy USD$ stocks once the cash is in the RRSP, so if the exchange rate is low, and you don't need the money yet, it is not a big deal.  Convert to CDN, put into RRSP, then convert to $USD stocks within the same week, for minimal currency risk.  Some brokerages eliminate some of these steps, too.

Best plan is to keep saving and investing, both in business, savings, and in your own skills.  At the end of the day, it really doesn't matter much if you lose 10% to tax issues between the countries, as long as you keep building your stache.


tweezers

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Re: Early retirement in Canada/US
« Reply #8 on: August 19, 2016, 11:46:44 AM »
In case you're not already aware of this; you cannot just apply for a greencard, but need sponsorship through your employer, a family member, or by claiming refugee status.  There are other ways as well (e.g. greencard lottery), but these are generally limited to those with a specific set of circumstances.  If this is something that your employer plans to do, I agree that starting sooner than later is preferred as it can take some time and requires considerable hoop-jumping (mine took 18 months; also Canadian ex-pat).  Also, these rules may have changed, but an H1b is only a three year visa and can only be renewed twice (although there is an allowance for a one year extension if it is set to expire while in the greencard process).

https://www.uscis.gov/greencard