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One-third of Canadians are considering early retirement: the impact on retirement planning for U.S. Expats in Canada

June 18, 2022

In a recent RBC Insurance poll, one-third of Canadians aged 55-75 are considering accelerating their retirement plans. Reasons vary but the current economic situation is one of the considerations and managing rising expenses is something all people are reviewing as inflation rises.

Everyone plans for retirement, or at least they should according to the experts. As the economy shifts, conversations can turn to longer-term investments to ensure their value is stable. According to the United States Social Security Administration in 2020, over 110,000 US citizens were receiving social security benefits in Canada, including for retirement, and shares that Canada is the top country for US citizens to select for retirement. Some of these individuals would have moved to Canada earlier in their life for careers, lifestyle and family, and some would be more recent moves.

When it comes to retiring as a U.S. expat in Canada, some additional steps will be needed to manage two currencies and multiple sources of retirement income. This is one reason why it’s a good idea to start planning for retirement as a U.S. expat in advance.

Understanding Canadian Retirement Programs

It’s important for you to understand how retirement plans in Canada work and how they affect you. Canada’s retirement system is made up of three parts. Those parts are the Canadian Pension Plan, Old Age Security, and the Quebec Pension Plan. The QPP is only relevant to residents of the province of Quebec and is equivalent, in principle, to the CPP for everyone else. Along with these, Canada also had private retirement plans.

According to the [Government of Canada](It’s important for you to understand how retirement plans in Canada work and how they affect you. Canada’s retirement system is made up of three parts. Those parts are the Canadian Pension Plan (CPP), Old Age Security (OAS), and the Quebec Pension Plan (QPP). The QPP is only relevant to residents of the province of Quebec and is equivalent, in principle, to the CPP for everyone else. Along with these, Canada also had private retirement plans.

But, are U.S. expats eligible for any of this? That depends if they meet certain criteria. According to the Government of Canada website, to be eligible for CPP benefits, you must:) website, to be eligible for CPP benefits, you must:

  • Be at least 60 years old
  • Have made at least one valid contribution to the CPP
  • Eligibility for OAS is a little more tricky. If you are living in Canada, you must:
  • Be at least 65 years old
  • Be a Canadian citizen or legal resident at the time your OAS application is approved
  • Have lived in Canada for at least 10 years since you were 18

This is relevant to you if you’ve been in Canada for a while, but what do you do if you have a Social Security Pension for the U.S.? What about some U.S. 401K funds?

Transferring Funds or a U.S. Pension to Canada

The most common solution to retiring in Canada from the U.S. is transferring your funds from your Social Security Pension and/or your 401k to Canada. It is best for you to speak to a certified Canadian tax accountant familiar with dual citizenship rules and regulations for advice as you get closer to retirement. Some considerations you can speak to your advisor about are:

When transferring funds from the U.S. what should you keep in mind?

  • One of those questions to ask about is the Early Withdrawal Penalty. This makes it so that if you try to transfer your U.S. retirement plan to Canada while you are under the age of 59.5, 10% of your withdrawal will be deducted.
  • The other thing to ask your advisor about is the U.S. Withholding Tax. This means that when a lump sum is distributed from a U.S. retirement plan to a person who is not a U.S. resident it is subjected to a withholding tax of 30%. This can be different for U.S. expats residing in Canada, though, due to the Canada/U.S. Income Tax Treaty. This reduces the withholding tax to 15% when the withdrawal is seen as a periodic payment.

It’s important for you to make sure that you know how withdrawals and social security payments work for your situation and if withholding tax applies to you, speak to a tax professional.

Make sure you understand your specific retirement plan when beginning to plan your retirement as a U.S. expat in Canada and get advice from a qualified retirement and tax professional.

Canadian Tax Implications of Transferring U.S. Retirement Funds

Whatever amount you withdraw from your U.S. retirement plan has to be included as taxable income on your Canadian Tax Return (something you must do as a Canadian resident). This is included as taxable income for the year the retirement funds are withdrawn and received. Your tax accountant can be invaluable when planning these withdrawals. When speaking with your advisor, consider these important areas:

Can you put the funds from your U.S. retirement plan into a Canadian RRSP (Registered Retirement Savings Plan) before you retire? –this is where planning in advance comes in. If this is done, you may be able to claim it as a tax deduction, therefore offsetting some of the taxes and costs of transferring funds. The problem is, this can only be done under certain conditions. According to BMO, those conditions are:

  • The money you transfer to an RRSP has to be attributable to work you have done while you were a retirement plan member. This work must also be during a time when you were not a resident of Canada.
  • The money withdrawn from any U.S. retirement plan must be a lump sum rather than periodic payments. In the case that your U.S. plan applies the periodic payment withholding tax rate of 15% to your lump sum transfer, the amount may still qualify for a tax deduction.
  • When you transfer your funds to an RRSP, you must do it in 60 days or less after the calendar year ends during the year in which your U.S. retirement plan is collapsed.

There is a lot to take note of and learn about when planning for your retirement as a U.S. expat in Canada. Transferring funds can be complicated and it’s best to contact an expert on it to ensure that you do it correctly and figure out what is best for your situation.

Receiving US Social Security Payments when in Canada

Once you are retired you will decide when your social security payments start. At this point, you will need to manage the inflow of US dollars and decide how you will convert these funds to Canadian dollars. In our article Managing Foreign Pension Income, we share how to earn more on these transfers by getting the best USD to CAD rate and it isn’t by doing this exchange through your bank.

Most banks such as TD, CIBC, RBC and Scotiabank don’t give their individual customers the best rates for currency exchanges. We typically have these banks in Vancouver send their customers to us to get the best exchange rates.

We offer an easy-to-use online platform that allows you to transfer between your USD and Canadian bank accounts at your Canadian bank of choice. Our team of online representatives specializes in helping set up and manage these transactions. You can be fully self-sufficient or get help as needed. In our article 5 Top Reasons To Switch To Online Money Transfers, we share some of the benefits and conveniences.

If you need help transferring funds and managing currency exchange, we can help you with that. This kind of retirement (and any retirement) is complicated. Don’t be afraid to ask for help! Contact us today!

Please note that this article is for informational purposes only covering a wide set of circumstances and rules for taxation and retirement benefits can change each year, speak to a certified tax professional for specific advice on retirement planning. Our area of expertise is currency exchange, and we are happy to answer your questions regarding your needs when converting currencies.