US Expat Living in Canada Looking for Investment Advice

[markymarq]

I’m a 29 year old US citizen currently working and living in Vancouver, Canada. I will remain here for the foreseeable future, however I plan to eventually move back to the States for retirement.

I have a large sum of money in my Canadian bank account, of which I’m very eager to put towards retirement, however I need advice on what's the best route I should take. I recently opened an RRSP account, which is the Canadian equivalent of an IRA, however I haven't started contributing much into it yet. My main concerns were tax related. I know that there is a tax treaty between Canada and the US to avoid double-taxation ala a foreign tax credit. However, I wasn't 100% clear on this.

Another plan I’ve made is to start transferring money to the US every month to invest it there, however I won't be able to contribute to an IRA because I'm only earning income in Canada at the moment. Also, the exchange rate is not in my favor right now (1 Cad to .78 USD) I would lose roughly 22% of every dollar that I convert. The exchange rate appears to be on the rise at the moment, being closely correlated to the price of oil, but its hard to predict where it will be down the road. My logic is that if I transfer monthly, I will essentially be dollar cost averaging the price of CAD compared to USD.

Do you have any advice on what would be the most beneficial solution to my situation? Do you guys think its wise to max out my contributions to my RRSP account, while also consistently transferring the remainder to the States regardless of the currency exchange rate?

Thank you!!

[zolotiyeruki]

I'm not sure that the exchange rate is a good excuse not to invest in USD.  If you keep it in CAD in hopes of selling/withdrawing it later, you're betting that the exchange rate will change in your favor between now and then.   And vice versa--if you invest it in USD, you're betting the CAD will lose value.

Assuming you're planning to return to the US long-term, I'd invest it in the US.

[nereo]

Hello Markymarq, and welcome. 

Sorry I didn't see this earlier.  I've been a fairly similar situation to you over hte past 3+ years; a US citizen living and working in Canada while having no US income.  We now have money tied up in both systems.

First, a good resource on how to invest in Canada is the Canadian Couch Potato series.

Second, you are correct that the US and Canada have a tax treaty.  When filing your US income taxes (something you are required to do even while living abroad) just use form 2555 "Foreign Earned Income".  The first $100,800 (USD) of earned income in Canada will not be taxed.  Ditto for anything in an RRSP. If you are investing int he broader market within Canada (e.g. in eFunds), you'll pay capitol gains taxes there and that also won't be taxed in the US.  Finally, you still get your standard deduction of $6,300/year in the US even if you aren't earning any money there.

Third, I think you are falling into the 'currency equivalence trap'.  Just a few years ago the currencies were about equal, but since WWII they have varied from about 0.59¢ to $1.1, with our current levels (roughly 78¢) being very close to the mean.  However, since these are two large economies there's no 'reversion to the mean' here - we could certainly see the exchange go much lower or much higher, all depending on how Canada does relative to the US.  Many people try to make money on currency exchange, and very few do very well.   Plus, we are highly influenced by 'recency bias'.  All we hear right now is about the 'weak loonie' - but it's weak compared to where it was 3 years ago.  Compared to 2001 it's quite strong today.  It's all about perspective.

All that is to say that you should transfer money only when you need to transfer it.  You can't control or predict the exchange rate in the future, so don't try.

Final thoughts:
i) yes max out your contributions to your RRSP.  THat will provide you with a tax shelter and tax-free growth.  The worst thing to do is to just let huge sums of cash sit on the sidelines like idle employees goofing off.
ii) convert funds to USD as needed and in the method that makes you most comfortable.  Since this isn't a case where "the market always goes up!" DCAing your conversions is a fine strategy and will even out the bumps.
iii) if you have any money in the US in a tIRA start a roth pipeline.  You might not be able to contribute but you can use your standard deduction to pay NO taxes on a conversion while living abroad.  It's the one silver lining to not being able to contribute.

[TravelJunkyQC]

Hello Markymarq, and welcome. 

Sorry I didn't see this earlier.  I've been a fairly similar situation to you over hte past 3+ years; a US citizen living and working in Canada while having no US income.  We now have money tied up in both systems.

First, a good resource on how to invest in Canada is the Canadian Couch Potato series.

Second, you are correct that the US and Canada have a tax treaty.  When filing your US income taxes (something you are required to do even while living abroad) just use form 2555 "Foreign Earned Income".  The first $100,800 (USD) of earned income in Canada will not be taxed.  Ditto for anything in an RRSP. If you are investing int he broader market within Canada (e.g. in eFunds), you'll pay capitol gains taxes there and that also won't be taxed in the US.  Finally, you still get your standard deduction of $6,300/year in the US even if you aren't earning any money there.

Third, I think you are falling into the 'currency equivalence trap'.  Just a few years ago the currencies were about equal, but since WWII they have varied from about 0.59¢ to $1.1, with our current levels (roughly 78¢) being very close to the mean.  However, since these are two large economies there's no 'reversion to the mean' here - we could certainly see the exchange go much lower or much higher, all depending on how Canada does relative to the US.  Many people try to make money on currency exchange, and very few do very well.   Plus, we are highly influenced by 'recency bias'.  All we hear right now is about the 'weak loonie' - but it's weak compared to where it was 3 years ago.  Compared to 2001 it's quite strong today.  It's all about perspective.

All that is to say that you should transfer money only when you need to transfer it.  You can't control or predict the exchange rate in the future, so don't try.

Final thoughts:
i) yes max out your contributions to your RRSP.  THat will provide you with a tax shelter and tax-free growth.  The worst thing to do is to just let huge sums of cash sit on the sidelines like idle employees goofing off.
ii) convert funds to USD as needed and in the method that makes you most comfortable.  Since this isn't a case where "the market always goes up!" DCAing your conversions is a fine strategy and will even out the bumps.
iii) if you have any money in the US in a tIRA start a roth pipeline.  You might not be able to contribute but you can use your standard deduction to pay NO taxes on a conversion while living abroad.  It's the one silver lining to not being able to contribute.

I'm in the same situation, and +1 on everything mentioned above. I have retirement and non-retirement savings/investment accounts in both countries. Max them all out as much as is legally possible, and as long as your income is below the 100K~ mark, you won't pay income tax in the US. I regularly transfer between both countries so that I can use my US bank accounts when I'm in the states visiting - as long as you do it on a regular basis, yes you lose money, but meh, the way I think about it is that the things I purchase in the states are cheaper anyway, so my purchasing power isn't that affected anyway.

[markymarq]

Thanks! All of the above information is very helpful and gives me more confidence in my investment strategies. One thing I was confused about was nerero's 3rd point:

iii) if you have any money in the US in a tIRA start a roth pipeline.  You might not be able to contribute but you can use your standard deduction to pay NO taxes on a conversion while living abroad.  It's the one silver lining to not being able to contribute.

What did you mean by a roth pipeline? Btw, I currently already have roth IRA account but haven't been able to contribute for the past several years.

[nereo]

Thanks! All of the above information is very helpful and gives me more confidence in my investment strategies. One thing I was confused about was nerero's 3rd point:

iii) if you have any money in the US in a tIRA start a roth pipeline.  You might not be able to contribute but you can use your standard deduction to pay NO taxes on a conversion while living abroad.  It's the one silver lining to not being able to contribute.

What did you mean by a roth pipeline? Btw, I currently already have roth IRA account but haven't been able to contribute for the past several years.

A ROTH pipeline is a tax strategy designed to utilize the tax advantages of a traditional IRA when you have a high income while converting that money into a ROTH when your income is low.  IT allows you to get the best of both worlds and 'average out' high earning years with low/no earning years.

Here's a good post on it:
http://www.madfientist.com/retire-even-earlier/

In short, you must first have money in a traditional IRA.  IF you do, you can convert that money at any time to a ROTH IRA by paying the obligate taxes on it.  Since you are not earning any income inside the US, you can use your standard deduction to offset that tax penalty.
For example:  IN 2015 my wife and I had an automatic deduction of $12,600.  We converted $12,000 from our Traditional IRA accounts to a ROTH account (saving some headroom for capitol gains in other taxable accounts we hold). Our tax liability for this transfer was effectively $0, since the standard deduction cancels it out.

In practice it's a way of augmenting the pain of not being able to contribute to an IRA while living abroad. 
If all you have is ROTH accounts - this strategy won't do you much good.  If you have any leftover 401(k) or tIRA accounts, you can convert them into ROTH accounts bit by bit (~$6,300 per year).

[Americans Abroad]

There are 401K and IRA solutions available specifically for Americans living abroad, these solutions can also be structured in any currency of your choice and reporting is done on your behalf.