Retirement Savings as a Canadian in America


Disclaimer: I'm not a tax person. Some of this may be wrong. This is a summary of what I've found and researched, but if you see anything wrong, please leave a comment and I will update it.

Various people have been asking me recently about this sort of stuff and what they should do, so I decided to write something that will hopefully clarify what options are available to Canadians.

A little background...

In Canada, there are two primary account types used for retirement. First, you have the RRSP, which is a tax deferred account. An advantage of this is that any amount you put into the RRSP reduces your taxable income now, and instead pay income when you withdraw from it. If you anticpate having a lower income in retirement (which is a typical case) you would pay less income tax over your lifetime overall. Another advantage is that any amount saved in income tax in the present can be used for additional investment. The second type of account is the TFSA. In this account you put in post-income tax money, but any investment gains in this account are no longer taxed. The yearly contribution limit for this account in $5500.

In America, you have the 401k and the IRA. These both come in two forms: Roth and traditional. The traditional forms are tax deferred accounts, so contributions are deducted from present income, but will incur income tax upon withdrawal. The Roth forms require post-tax deposits, but any gains will not be taxed, assuming you withdraw at age 59.5 or above. As far as I understand, not every employer gives access to a 401k, but you can always create an IRA on your own. The maximum contribution for 401k in 2015 is $18000 and $5500 for IRA. Rf your income is over $114k, access to Rotth accounts starts to phase out, stopping completely at $129k. If your income is over $129k, you can still contribute to a traditional IRA / 401k.

As a Canadian, you can consider the traditional 401k roughly equivalent to the RRSP, and the Roth IRA as a worse version of the TFSA (because of additional withdrawal restrictions).

Of course, knowing both the Canadian and American accounts only amtter if you anticipate leaving America and going back to Canada. If this is the case, knowing your various options with the money in these accounts will help you decide how to use these accounts in the first place.

Options for Retirement Accounts After Leaving America

1. Withdraw everything

This option is pretty self explanatory. You can withdraw all your money from traditional 401k and IRA accounts and then do whatever you want with it afterwards. You will be charged a 15% withholding tax on the withdrawal as well as a 10% early withdrawal fee if you are less that 59.5. If you are moving back to Canada, you need to report this, but this withdrawal will get you a foreign tax credit. The foreign tax credit you receive should be equivalent to the amount taxed from the withholding and penalty tax. However, the foreign tax credit is only useful when it can be applied to reduce any Canadian income. The foreign tax credit can only be used the year of, but the withdrawal can be done over several years to fully take advantage of the foreign tax credit.

2. Leave it all in America

This options allows for continued tax deferred gains. I'm unclear as to whether or not American taxes need to filed every year, but I would assume not, since everything is in retirement accounts. After turning 59.5 the money can be withdrawn, in which case you pay regular American income tax, and then Canadian tax on it (assuming Canadian residence).

3. Transfer it a RRSP

With some paperwork, traditional 401k / IRA can be transferred to a Canadian RRSP. This wouldn't count towards the RRSP contribution limit. The transfer would still be hit with the 15% withholding tax and potentially 10% penalty tax, but a foreign tax credit would be received for that amount (15% withholding + 10% penalty). There is no equivalent transfer from RRSP to IRA, meaning there is no tax credit you will receive transferring from Canada to America. Again, the transfer to the RRSP can be done over several years to fully utilize the foreign tax credit.

Additional note on Roth accounts

If you have a Roth account, there is no way to transfer it over to a Canadian TFSA without tax implications. However, Canada respects the tax benefits that Roth accounts gives you. This means that you can still withdraw the principle from the Roth account tax free, and any withdrawals you make after you are 59.5 also remain tax free. Any early withdrawals on the gains will still be subject to the withholding and penalty tax. So if you are holding a Roth account it generally makes sense to keep at least the earnings in the account, but you would be stuck managing an additional account.

So what should you do?

So knowing all of this, and assuming you are optimizing for money (and minimal hassle), how should you allocate money to retirement accounts? The optimal decision depends on your exact situation, but I will outline what I consider to be the valid strategies.

Contribute the minimum and withdraw after leaving

If you intend to leave in a few years and never return, you should contribute only to the 401k up to whatever the employer matches (in many cases 0) and then withdraw everything after leaving America. Any employer matching should make up for the loss from the withholding and penalty tax. This has the advantage of keeping all of your finances together and being able to use it however you want. However, in addition to whatever taxes you would pay on the withdrawal, you would also be paying higher income tax during the years you are working in the US.

In General do this if:

  • You intend to return to Canada within a few years
  • Contribute the maximum and leave it in America

    If you don't mind the inconvenience of keeping a separate American account, this strategy should give you the most savings. You would pay the least amount of income tax in the present, and you wouldn't incur any taxes withdrawing or doing any transfers. This is a good option if you want the most savings and don't mind the hassle, or if you intend to return to America again in the future. The downside of this plan is that if you plan on making large purchases in Canada (like a house or car), you won't have access to this money. There is also the risk of USD tanking relative to CAD.

    In General do this if:

  • You want the most amount of savings
  • You don't mind potentially managing multiple accounts
  • You are or close to 59.5
  • Contribute the maximum and transfer over to RRSP

    This is similar to contributing and leaving in the America, but your accounts will be consolidated and allows you to do things like use the money to purchase property in Canada. You also wouldn't have to file US taxes anymore. However, since you are getting back tax credits on the withdrawal, your actual retirement holdings are less, as you've paid some taxes on what were tax deferred accounts. Again because you can't transfer a RRSP to a 401k, this should only be done if you never intend to return to America.

    In General do this if:

  • You intend to stay in Canada
  • You want to consolidate accounts
  • You continue to make income after returning to Canada
  • Conclusion

    Unless you need all of your money outside of retirement accounts, I would recommend contributing as much as possible into the retirement accounts. For someone unsure about the future like myself, this allows me to save while still giving me options on dealing with my money in the future.