In the last month or so, we’ve all heard of the many Americans who’ve pledged to move to Canada. And why not? I mean, we’re the country that brought the world Ryan Gosling and Ryan Reynolds.
So for those American readers who are contemplating the move up north, or for Canadians who want to understand our southern neighbours a bit better, here’s a short guide to how our Canadian individual retirement plans match up with American plans.
Ok, so let’s just start by saying, the US has waaaay more options for retirement plans than Canada does. Like, seriously, way more.
But there’s a trade off, and here, I’d say it’s that the American options are more complicated and have more rules around what you can and can’t do with your money in the plans; Canada’s two main designated retirement plans are generally simpler.
I’m going to focus on the two major programs that are comparable between the US and Canada, but if you’re an American reader, just know that this is not an exhaustive list because you guys have a huuuuge amount of options.
RRSP vs. Traditional IRA
Both countries’ governments agree that people don’t like taxes, and that giving people an option to avoid paying taxes on income (legally!) might be a motivating factor in saving.
Canada offers the Registered Retirement Savings Plan (RRSP), into which Canadians can make tax-deductible contributions until the age of 71. The money can be withdrawn any time, but is considered taxable income (with a few exceptions like the Home Buyers’ Plan). Then, at age 71, the holder can cash out the RRSP or convert it to Retirement Income Fund or an annuity.
The American Individual Retirement Account (IRA) is very similar, in that contributions are tax-deductible, withdrawals are taxable, and it can be held until the owner reaches age 70.5 at which point, it has to be moved.
The biggest difference is that while both of the maximum contribution limit for both of these plans is based on income, the Canadian maximum is far higher ($25,370 vs $5,500).
TFSA vs. Roth IRA
Both Canadian Tax-Free Savings Accounts and American Roth IRAs have a limit of $5,500 and both offer tax-free income during retirement, without providing tax-deductible contributions during working years.
In contrast to TFSAs where you have to be 18 to contribute, there aren’t any age restrictions on who can contribute to a Roth IRA.
Similarly, where Canadians can withdraw money from their TFSA whenever they want, there are some rules associated with when you can touch your Roth IRA balance (i.e. after the account has been opened for 5 years or if the person is disabled, or over age 59.5).
And finally, Canadians have the benefit of a rolling contribution limit – meaning we don’t lose the room if we don’t contribute to the maximum; Roth IRAs don’t have similar flexibility, but they do allow “catch up” payments of $1,000 per year to those 50 and older who are behind on saving for retirement.
Which accounts to invest in?
Whether you’re Canadian or American, there are some fantastic free resources online to help you navigate where you should invest your RRSP/TFSA or your IRA.
American readers, you guys are lucky to have the folks at The Simple Dollar on the case for you. They’ve pulled together the research and figured out the best IRA accounts for you, depending on your experience level or your investment preferences. Check it out!
Government-Provided Retirement Benefits
Since studies show that Canadians and Americans both share some challenges in saving for retirement, it’s no surprise that a lot of people are relying on government benefits in retirement. First, DON’T DO THIS.
But, for the sake of comparison, if you agree that you will save for retirement and not be tempted to just wait for government benefits, you can read on for a comparison of the government-provided retirement benefits.
Do you promise?
OK. I trust you.
The US and Canada both offer guaranteed income to seniors once they reach a designated age – Social Security in the US, and Canada Pension Plan in Canada.
Both are typically funded by payroll deduction (with Americans contributing 6.2% vs. Canadians 4.95%), and for both, the longer you wait to claim the benefit (up to age 70) the more money it will pay out. This is great for those who haven’t saved up for retirement, but for those who want to retire early and still take advantage of the maximum government benefit, it means having to save up your own retirement income during your working years (which everybody should already be doing anyway).
In Canada, there is also the Old Age Security (OAS) benefit, which is given to anyone 65 or older who has been a Canadian resident for at least 10 years; and for those with the lower incomes, Old Age Security is also topped up by the Guaranteed Income Supplement.
The US doesn’t provide an equivalent to OAS, but it does have a program called Supplemental Security Income for low-income people age 65 or older.
Social Security usually provides a much higher payout in retirement than all of Canada’s programs combined (the maximum amount is almost double) – which makes sense, given that Americans contribute more to it over their lifetimes.
The trade off here is that Canadians generally have more access to better benefits during their working lives, which should – in theory – contribute to greater savings in their retirement years.
Finally, the other factor is sustainability, the Canadian system is generally in pretty good shape, with no serious concerns about the plan running out of funding. It’s projected though that Social Security won’t be able to pay the full benefit after 2033; unless the government figures out a way to change the program, it will only be able to pay out 75% of what it currently offers.
So, to my American readers, what do you think? If you’re still thinking of heading north, I can tell you that as of today, my house may be under 3 feet of snow, but my retirement options are looking mighty fine.