Retirement in Canada vs. America: An Overview
American and Canadian governments provide many of the same types of services to those planning for retirement and those who have retired; however, Canadian retirees find life after work to be much less stressful, as fears of running out of money are not as prevalent as they are in the United States. Such fears drive some American retirees to find ways to supplement their retirement incomes.
A major benefit for Canadians is the publicly funded universal health care system, which provides them with essential medical services throughout their lives, as well as in retirement, without copays or deductibles.
In contrast, unless they are disabled or extremely low-income, Americans have no single-payer insurance until they reach age 65, when they can qualify for Medicare. Even that is far from comprehensive. Medicare covers around 59% of healthcare costs.
A 2021 study by the Employee Benefit Research Institute estimates that some 65-year-old couples, without employer health coverage, will require approximately $360,000 to comfortably afford Medicare premiums and out-of-pocket medical expenses in retirement.
Key Differences: Retirement Savings Plans
When it comes to saving for retirement, Canada and America both offer individuals similar financial vehicles with similar tax advantages.
Contribution Limits: RRSP vs. Traditional IRA and 401(k)
In Canada, Registered Retirement Savings Plans (RRSPs) allow investors to receive a tax deduction on their yearly contributions. Money invested in the plan grows tax-deferred, which advances the benefits of compounded returns. Contributions can be made until the age of 71, and the government sets maximum limits on the amount that can be placed into an RRSP account (18% of a worker’s pay, up to CA$29,210 for 2022 and CA$30,780 for 2023).
Investors can contribute more, but additional sums over $2,000 will be hit with penalties.
In the United States, traditional individual retirement account (IRA) contributions are more limited than their Canadian counterpart. The Internal Revenue Service (IRS) has set the maximum contribution for traditional IRAs at $6,500 per year for 2023, or the amount of your taxable compensation for the taxable year. People aged 50 and over can sock away an additional $1,000 per year in 2023 as part of a catch-up contribution.
Also, IRAs carry a 10% tax penalty if funds are withdrawn before the taxpayer reaches the age of 59½; however, there is a special exemption at the age of 55 called the 72(t) that allows distributions without penalty.
Defined Contribution Plans
Defined contribution plans, which includeAmerican 401(k) plans, offered through an employer, are more comparable to RRSPs. The annual contribution limit for 2023 is $22,500, and those who are aged 50 and over can contribute an additional $7,500 per year for a total of $30,000.
IRA Contribution Age and the SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed by President Trump in December 2019. The Act eliminates the maximum age for traditional IRA contributions, which was previously capped at 70½ years old.
However, Americans who turned 70½ years old in 2019 still needed to withdraw their required minimum distributions (RMDs) in 2020 or they incurred a hefty 50% penalty of their RMD. Those who turned 70½ years old in 2020 are not required to withdraw RMDs until they are 72. The first withdrawal needs to occur before the following Apr. 1, so individuals who turned 70½ in 2019 could have waited to withdraw their RMD until Apr. 1, 2020. They were then required to take another RMD by the following Dec. 31, and every Dec. 31 thereafter. RMDs are required at age 72.
Withdrawals and Taxes
Withdrawals from an RRSP can occur at any time but are classified as taxable income, which becomes subject to withholding taxes. In the year in which the taxpayer turns 71, the RRSP must be either cashed out or rolled over into an annuity or Registered Retirement Income Fund (RRIF).
For American taxpayers, traditional IRAs and 401(k)s are structured to provide the same sorts of benefits, whereby contributions are tax-deductible and capital gains are tax-deferred; however, withdrawals or distributions are taxed at the person’s income tax rate.
Canada’s TFSA vs. America’s Roth IRA
Canada’s Tax-Free Savings Account (TFSA) is fairly similar to Roth IRAs in the United States. Both of these retirement-focused vehicles are funded with after-tax money, meaning there’s no tax deduction in the year of the contribution; however, both accounts offer tax-free earnings growth, and withdrawals are not taxed.
Contribution Limits for TFSAs and Roth IRAs
Canadian residents over the age of 18 can contribute up to CA$6,000 to TFSAs in 2022; those who contributed in 2022 for the first time were eligible to deposit CA$81,500, provided they turned 18 in 2009 (the year the accounts originated).
The annual maximum contribution to a Roth IRA is $6,500 for 2023 or $7,500 with the $1,000 catch-up contribution for those aged 50 and over. Also, there is no limit on when one must stop making contributions and begin withdrawing money with either of these accounts.
Advantages of TFSAs Over Roth IRAs
TFSAs offer two significant advantages over Roth IRAs. Young Canadians saving for retirement are able to carry over their contributions to future years, while such an option is not available with Roth IRAs. For example, if a taxpayer is 35 years old and unable to contribute CA$6,000 into their account, due to an unforeseen outlay, next year the total allowable amount accumulates to CA$12,000.
The contribution limits have changed year-to-year since the TFSA was first introduced in 2009, with the limit sometimes set at different ranges between $5,000 and $10,000; the current cumulative limit for 2022 is CA$81,500.
Secondly, while sums equivalent to contributions can be withdrawn at any time, distributions of earnings out of Roth IRAs must be classified as “qualified” in order to avoid taxes. Qualified distributions are those made after the account has been open for five years, and the taxpayer is either disabled or is at least 59½ years old. Canada’s plan does offer more flexibility in terms of providing benefits for those planning retirement.
Key Differences: Government Pensions
Both the United States and Canada provide workers with a guaranteed income once they reach retirement age; however, these federal pension plans differ from each other in several ways.
Canada’s Old Age Security
Canada has a three-part system:
Old Age Security (OAS), financed by Canadian tax dollars, provides benefits to eligible Canadians 65 years of age and older.
The Canada Pension Plan (CPP), funded by payroll deductions (like Social Security in the United States), makes benefits available as early as age 60.
The Guaranteed Income Supplement (GIS) is available to the very poorest Canadians.
OAS provides benefits to eligible citizens 65 years of age and older. Although there are complex rules to determine the amount of the pension payment, typically, a person who has lived in Canada for 40 years, after turning 18, is qualified to receive the full payment (as of October through December 2022) of CA$685.50 per month from the age of 65 to 74, and CA$754.05 if they are 75 and older.
Additionally, for the time period of October 2022 to December 2022, Guaranteed Income Supplements (CA$616.31 or CA$1,023.88 dependent on marital status) and Allowances (CA$1,301.81) are provided for pensioners with an annual income of up to CA$38,448.
The OAS implements a clawback provision, known as the OAS recovery or repayment, which means that high-income earners over the age of 65 are required to repay some or all of the OAS pension. This clawback is adjusted annually for inflation and will vary by reported income.
Much like with Social Security, OAS beneficiaries who choose to delay receiving benefits can get higher payouts; currently, benefits can be delayed for up to five years, up to age 70. OAS benefits are considered taxable income and they carry certain payback provisions for high-income earners.
To subsidize universal healthcare and pensions, Canada imposes higher income taxes on its citizens than the United States does on its residents.
American Social Security, on the other hand, does not focus exclusively on providing retirement income but encompasses such additional areas as disability income, survivor benefits, and Medicare (to the extent that Medicare premiums are taken out of Social Security benefits).
Social Security income tax issues are slightly more complex and depend on such factors as the recipient’s marital status and whether or not income was generated from other sources; the information provided in the IRS Form SSA-1099 will determine the tax rate for the benefit.
Generally, Canada’s retirement programs are considered safe, as they are funded out of general tax revenues. In the United States, there have been continuous fears that the Social Security system, which is instead funded through payroll taxes on employee wages, will become underfunded.
Individuals are eligible to receive partial benefits upon turning 62 and full benefits ($3,345 per month is the maximum in 2022 and $3,627 in 2023) once they are 66 or 67, depending on the year of birth.
Eligibility is determined through a credit system, whereby qualified recipients must obtain a minimum of 40 credits, and they can earn additional credits to increase their payments by delaying initial benefit payments up to age 70.
Can a Canadian Retire Full Time in the U.S.?
A Canadian citizen cannot retire full-time in the U.S. without going through the proper immigration channels. There are ways that a Canadian can retire part-time in the U.S., as they are legally allowed to spend six months a year in the U.S. without needing visas/permits.
Can You Collect U.S. Social Security in Canada?
Yes, as a U.S. citizen, you can collect Social Security if you live in Canada or anywhere else outside of the U.S. as long as you are eligible for Social Security.
Does Canada Tax U.S. Retirement Income?
Yes, Canada taxes U.S. retirement income and is different for the specific type of retirement income. Social Security is only taxed in the country of residence. So if you receive U.S. Social Security income and live in Canada, that income will be taxed in Canada and not the U.S. U.S. pension income will be taxed both in the U.S. and Canada, but in Canada, the U.S. portion is available as a foreign tax credit.