Retirement planning can be a complex task, especially for Canadian residents whose lives are complicated by their cross border reality. This case study explores the financial journey of Annie and Chuong, a couple with cross border assets and pensions, as they approach retirement.
Seeking professional guidance, they enlisted the help of Modern Cents to create a comprehensive retirement plan that considers their unique circumstances, goals, and the intricacies of retirement assets and pensions in both countries.
Meet:
Annie & Chuong are both dual citizens of the U.S. and Canada and have spent the past more than 20 years living and working in Washington State. They moved back to Canada during the pandemic to be closer to their adult son who is living in Toronto. Annie, a scientist, is working remotely for the same U.S. employer and Chuong, an artist, is working part-time teaching classes online. They came to us as they are hoping to retire in the next year or so and unsure if they are on track to do so. Additionally, they have accumulated assets on both sides of the border and would like some guidance as to how these and their pensions fit into their retirement plan.
Assets & Pensions:
Annie has a 401(k), a rollover IRA and Roth IRA and Chuong has an IRA and Roth IRA in the United States. Both also have RRSPs in Canada and are living in a house they purchased upon their return to Toronto just over a year ago. They also have 6 months’ worth of expenses saved in a joint bank account in the U.S. Annie will be eligible for CPP, OAS, and Social Security, while Chuong qualifies for OAS and Social Security.
Challenges and Planning Work:
Annie and Chuong face several planning complexities, which include determining the optimal start age for each pension, understanding the implications and benefits of deferral, how the Windfall Elimination Provision (WEP) and Goverment Pension Offset (GPO) affect future pension benefits, complying with various regulations such as RMDs, RRIF minimums, positioning their investment portfolio for withdrawals, managing withholding taxes on IRA/401(k) distributions, addressing foreign exchange considerations for RMDs, and ensuring emergency savings in Canadian dollars.
The Plan:
After conducting a thorough analysis of Annie and Chuong's financial situation, we developed a retirement income plan that aligned with their goals and addressed the complexities of their cross border assets and pensions. The plan included the following recommendations:
Bringing U.S. savings to Canada: Taking advantage of the favourable exchange rate, the U.S. savings were transferred to Canada and placed in a high-interest savings account earmarked as an emergency fund.
Compliance and Tax Efficiency: The U.S. retirement accounts were moved to a cross border licensed advisor in Canada to ensure compliance with U.S. securities laws. This also provides potential eligibility for the U.S.-Canada treaty withholding tax rate when periodic payments commence.
Cash Availability: Over the next year, Annie and Chuong begin to realise profits on investments within their IRAs and RRSPs, creating liquidity for withdrawals during retirement.
Converting RRSPs to RRIFs: Upon retirement, Annie and Chuong convert their Canadian RRSPs to RRIFs to generate pension income eligible for income splitting and the pension tax credit.
Deferral of Pension Benefits: Upon calculating how the WEP affects her U.S. Social Security benefit, Annie ought to defer this pension at least until she reaches FRA (Full Retirement Age) and CPP until her Normal Retirement Age to take advantage of the deferral bonus and maximize lifetime benefits.
Optimizing OAS benefits: Annie and Chuong to defer receiving OAS, maximizing the benefit amount based on their years of residence in Canada.
Spousal Social Security Scheme: It is determined that Chuong’s benefit under the Spousal Social Security scheme will be greater than what he is eligible for individually. We recommended that he commences his personal Social Security as soon as he is entitled to at age 62 then switches to the spousal benefit when Annie applies for her Social Security.
Conclusion:
Annie and Chuong's retirement planning journey exemplifies the intricacies and considerations involved in crafting a comprehensive retirement plan for cross border residents. By partnering with Modern Cents, they were able to navigate the complexities of cross border assets and pensions, ensuring a financially secure retirement.