Author Topic: Canada vs US - Who's got the upper hand?  (Read 6370 times)

AJDZee

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Canada vs US - Who's got the upper hand?
« on: July 29, 2013, 09:04:09 AM »
Reading these forums, it's great to hear about the investment options in the US. (which I don't know much about)
I'm up to speed on the basic Canadian savings programs, which I think are pretty badass.

But it makes me wonder, who's got it better - Canadians with their RSPs and TFSAs, or Americans with their 401Ks and ROTH IRA? Certainly one country has to have it better, and if so, how much of an advantage do they have?

Thought it would be a neat discussion to compare with some smart mustachians on here!

For those who don't know the basics of the Canadian vehicles:

RSP: tax deferred, you get a tax refund on your contributions equal to your marginal tax rate, but are taxed when you take it out when you're retired (FI). Your contribution limit is 18% of earnings per year, with a max of (I think currently) ~$24,000, and unused contributions can be used any year after, until you're an old fart. Can hold a wide range of investments. Cannot claim capital losses, obv.

TFSA: Tax free savings account, contributions don't generate tax refunds however withdrawls are not taxed. Contribution limit of $5,500 per year regardless of income (just have to be over 18), and goes up with inflation every couple years (2009-2012, limit was $5,000). Unused contribution is carried forward, i.e. every Canadian has $25,500 contribution room as of January 1st, 2013, if no contributions to date. Any withdrawals increase your contribution room for the following year by the same amount. TFSAs can hold all sorts of investments like RSPs, but again, cannot claim capital losses.

Those are the basics, although I'm missing a whole bunch of other little details.

So who's got the advantage to FIRE, CAN or USA, and how big is that advantage?

hoopy

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Re: Canada vs US - Who's got the upper hand?
« Reply #1 on: July 29, 2013, 09:47:03 AM »
Canada has some good vehicles for holding your investments, however the US has access to way better investment options.

- Mutual Fund fees in Canada are among the highest in the OECD.
- Canadian ETF fees are slightly better than mutual fund fees. However, the US has better, simpler, cheaper options, such as Vanguard Total Market. Vanguard recently arrived in Canada, however its fees are a bit higher than in the US. Still cheaper than its competition.
- The Canadian government charges tax (HST) on fund fees, bumping them up by another 13%.

Higher costs and fewer options in terms of appropriate passive investments all eat into your returns over time.

meadow lark

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Re: Canada vs US - Who's got the upper hand?
« Reply #2 on: July 29, 2013, 10:52:35 AM »
With your descriptions, the RSP and TFSA are pretty near identical to the 401k and Roth IRA.  So really, it all boils down to the options available.  The more interesting questions are San Francisco versus Vancouver.  (Vancouver all the way.). Poutine  versus frito pie.  (Tough.  I will vote for poutine though).  Tim Horton donuts versus Krispy Kreme.  (Sorry.  Krispy Kreme.  The original manna from heaven was actually Krispy Kremes.  True fact).  Calgary versus Hawaii.  (Hawaii).  Sudbury versus Hawaii.  Nova Scotia versus Hawaii.  For the win.
Edited to add: Great.  Now I want to go to Krispy Kreme.
« Last Edit: July 29, 2013, 11:20:56 AM by Meadow Lark »

matchewed

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Re: Canada vs US - Who's got the upper hand?
« Reply #3 on: July 29, 2013, 11:14:01 AM »

AJDZee

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Re: Canada vs US - Who's got the upper hand?
« Reply #4 on: July 29, 2013, 11:47:59 AM »
Eh I'm lazy. https://en.wikipedia.org/wiki/Comparison_of_401%28k%29_and_IRA_accounts

Figure it out. :)

Ah ha... so it appears the contribution limit is higher for 401K/IRAs.... but you can't touch your money until 59.5 with both accounts?? ...did I read that right? Does that mean anyone who retires earlier than 59.5 y/o in the US is living off of taxable accounts?

matchewed

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Re: Canada vs US - Who's got the upper hand?
« Reply #5 on: July 29, 2013, 11:56:43 AM »
Nah there's the Roth option. Which is contributions post tax. Generally can't touch earnings in those but can touch contributions.

AJDZee

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Re: Canada vs US - Who's got the upper hand?
« Reply #6 on: July 30, 2013, 07:36:18 AM »
Can you only open a 401K through an employer, or can anyone open one up?

Here in Canada I have both an employee matched account and my own self-directed RSPs. You just have to keep track of your contributions among the different accounts to ensure you don't surpass 18% limit.

Going by the flexibility I'd say I like Canada's options better than U.S when it comes to FI at an earlier age, but only since 2009 when TFSA was introduced to Canada.

The other side of the coin is nearly every consumer good, gas, food, etc is more expensive, even before you account for our higher sales tax.

KMMK

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Re: Canada vs US - Who's got the upper hand?
« Reply #7 on: July 30, 2013, 08:16:46 AM »
I think I'll stick with Canada as nothing is tied to employment and you can withdraw any of your money at any age.

henri

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Re: Canada vs US - Who's got the upper hand?
« Reply #8 on: August 02, 2013, 09:51:46 PM »
Another pretty cool investment vehicle available to Canadians is the RESP, which is specifically designed to build an education fund for your kids. As with the TFSA, one contributes after-tax money, but the kicker is the extra 20% top up the government gives you (up to a max of $500 per year and $7200 over the lifetime of the account - per kid). Some provinces also give you top up money (in my home province of British Columbia, you now get $1200 just to open an RESP). You can contribute up to $50k per kid. Top ups and gains are not taxed until withdrawn. Upon withdrawal, taxes are paid at your kid's marginal tax rate, which should be pretty low since he will presumably be a student at the time. Contributions can obviously be withdrawn tax free. If your kid does not attend college, the RESP can be rolled into your RRSP, if you have contribution space available. Otherwise, well you have a happy problem...

Also, I don't think anyone mentioned it, but because of a tax treaty between Canada and the US, there is no withholding tax on dividends paid by US stocks held in an RRSP. This is *not* the case with the TFSA or the RESP, where Uncle Sam takes his 15% cut before you see your money. Because of this tax treatment, I prefer dividend paying ETF's (I hold VIG and VYM in my RRSP) over VTI. This way, I generate a larger USD cash flow to buy more units. Converting CAD to USD unfortunately comes at a price...

Finally, one also gets a tax credit on eligible dividends paid by Canadian corporations on stocks held in a non-registered account (to avoid double taxation between corporate and personal taxes). Unfortunately, because corporate taxes have gone down recently, this tax credit has also shrunk. Capital gains are taxed at half your marginal rate and can be offset by capital losses incurred in the pas three years. Oh, and capital gains on your principal residence are tax free, but the interest paid on mortgages are not tax deductible, as is the case in the US.

I think that pretty much covers what is available to Canadian Mustachians to make their path to FI a little shorter...

Aloysius_Poutine

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Re: Canada vs US - Who's got the upper hand?
« Reply #9 on: August 02, 2013, 11:15:31 PM »
In Canada, home mortgage interest is not tax deductible like it is in the states. The USA has a huge advantage in that regard if home ownership is part of your stashin' fashion.

ender

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Re: Canada vs US - Who's got the upper hand?
« Reply #10 on: August 03, 2013, 06:30:59 AM »
In Canada, home mortgage interest is not tax deductible like it is in the states. The USA has a huge advantage in that regard if home ownership is part of your stashin' fashion.

This is only true if you itemize your deductions, though. For many people, this interest deduction does not amount to more than the standard deduction the federal government gives ($6100 for individual and $12,200 for married couple). Higher home prices make it more likely, though.

As far as ER goes, I think healthcare factors into this as well.

notquitefrugal

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Re: Canada vs US - Who's got the upper hand?
« Reply #11 on: August 03, 2013, 07:36:06 PM »
The flip side of this: sale of your primary residence in Canada is tax exempt. (provided you've lived there for 6 or more months)

To my mind, it's a wash.

In the US, gain on the sale of your primary residence is exempt up to $250,000 for single people and $500,000 for couples if you've lived there for 2 out of the past 5 years. The vast majority of people don't have gains of $250,000 on their primary residence.

pom

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Re: Canada vs US - Who's got the upper hand?
« Reply #12 on: August 05, 2013, 09:11:01 AM »
One way to look at it:

http://www.oecd.org/tax/tax-policy/taxingwages.htm

Canada: 30.8% taxes
US: 29.6%

Not much of a difference considering that the range is 7.0% to 56.0%


Another way:

https://en.wikipedia.org/wiki/Government_spending#As_a_percentage_of_GDP

2011 figures
Canada: government spends 39.7% of GDP (taxes 32.2%)
USA: government spends 38.9% of GDP (taxes 26.9%)


Aloysius_Poutine

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Re: Canada vs US - Who's got the upper hand?
« Reply #13 on: August 05, 2013, 02:32:12 PM »
^Considering the health care services provided in Canada, I'd say Canadians are getting much better bang for their tax bucks.

KMMK

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Re: Canada vs US - Who's got the upper hand?
« Reply #14 on: August 05, 2013, 03:36:35 PM »
One way to look at it:

http://www.oecd.org/tax/tax-policy/taxingwages.htm

Canada: 30.8% taxes
US: 29.6%


Interesting, thanks. I didn't think our income taxes were much higher. Whenever I see a US person listing gross and take-home pay amounts, the take-home always seems quite small to me. Probably because they have more deductions at source than I do. But the remainder still has to cover similar things.

Of course, there is the Canadian sales taxes as well, which can be quite high depending on what province you're in. But the less you buy the less you pay sales tax.

I don't know if our higher minimum wages and average incomes make up for the higher cost of living or not. In both places, that's mostly about personal choices.

i_am_the_slime

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Re: Canada vs US - Who's got the upper hand?
« Reply #15 on: August 06, 2013, 04:23:31 AM »
The thing I notice about Canada's accounts are that the unused contributions carry forward??  That is not the case in the US.  That's a nice feature!

plainjane

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Re: Canada vs US - Who's got the upper hand?
« Reply #16 on: August 06, 2013, 06:45:17 AM »
The thing I notice about Canada's accounts are that the unused contributions carry forward??  That is not the case in the US.  That's a nice feature!

Yes.  Also, for the tax deferred contributions (RRSP), you can decide to _also_ wait on claiming the deduction on your taxes.  So you can put in money early (compounding working in your favour), and then wait to take the deduction on a higher income year(s) when you are in a higher bracket.

AJDZee

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Re: Canada vs US - Who's got the upper hand?
« Reply #17 on: August 06, 2013, 03:45:06 PM »
The thing I notice about Canada's accounts are that the unused contributions carry forward??  That is not the case in the US.  That's a nice feature!

Yes.  Also, for the tax deferred contributions (RRSP), you can decide to _also_ wait on claiming the deduction on your taxes.  So you can put in money early (compounding working in your favour), and then wait to take the deduction on a higher income year(s) when you are in a higher bracket.

Yes it is a nice feature! Tuition credits can also be carried forward.
CPP/pension income splitting is a huge area for savings, I assume Americans can do that too though.