Most Canadians living in the United States enter retirement with several different types of accounts, but deciding which account to use first can have a major impact on long-term taxes.
Should you spend your taxable brokerage account first? Should you withdraw from your RRSP or traditional IRA while your tax rate is lower? And when does it make sense to preserve, or convert, your Roth assets?
In this video, Bryan Haggard, CFP® and CFA, explains:
- Why withdrawal order matters
- How brokerage accounts, IRAs, 401(k)s, Roth IRAs, RRSPs and LIRAs are taxed
- Why the traditional “taxable first, retirement accounts second, Roth last” strategy can sometimes fail
- How Roth conversions may fit into the early retirement years
- Where Canadian withholding taxes and foreign tax credits come into play
- How withdrawal decisions can affect future required distributions, Medicare premiums and a surviving spouse
- How a coordinated withdrawal strategy may use several accounts in the same year
The goal is not necessarily to avoid taxes completely. It is to manage taxes throughout retirement and reduce the risk of creating a much larger tax problem later.
Watch the video here:
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Summary
Quick recap
Bryan Haggard, a Certified Financial Planner and Chartered Financial Analyst, discussed the optimal strategy for Canadian retirees living in the United States to determine which retirement accounts to withdraw from first. He explained that the traditional approach of taking money from after-tax accounts first, then pre-tax accounts like IRAs and RRSPs, and finally Roth accounts may not be the best strategy for everyone, as it can lead to higher taxes later in life. Bryan recommended a blended tax rate approach that considers the “retirement tax valley” period when taxes are initially lower, suggesting that Canadian RRSPs and LIRAs should often be prioritized for early withdrawals to avoid potential tax issues upon death. He provided a case study of a client with various account types and demonstrated how a coordinated withdrawal strategy could help maintain lower tax brackets for a longer period while minimizing future tax burdens. Bryan emphasized that every individual’s situation is different and that proper cross-border retirement planning should coordinate all account types to create a long-term tax-efficient strategy.
Summary
Cross-Border Retirement Planning Challenges
Bryan Haggard, a Certified Financial Planner and Chartered Financial Analyst, discussed the challenges Canadians living in the United States face regarding retirement account withdrawals. He explained that many retirees have multiple account types, including RRSPs, LIRAs in Canada, and 401(k)s, IRAs, and brokerage accounts in the U.S., leading to confusion about which accounts to draw from first in retirement. Bryan highlighted that his firm, Retirement in Financial, helps simplify cross-border retirement planning for Canadians in the U.S.
Retirement Withdrawal Order Strategies
Bryan discussed the importance of withdrawal order in retirement planning, explaining that while the traditional approach suggests taking money from after-tax accounts first, then tax-deferred accounts like IRAs, and finally Roth accounts, this strategy may not be optimal for everyone. He emphasized that withdrawal order significantly impacts long-term tax projections and lifetime tax burden, particularly for clients seeking to minimize taxes throughout retirement. Bryan indicated that the discussion would cover how different account types like Canadian RRSPs and LIRAs fit into withdrawal strategies, as well as the potential benefits of Roth conversions and coordinated withdrawals for tax reduction.
Retirement Tax Planning Strategies
Bryan explained how tax burdens change during retirement, starting with high taxes during working years, followed by a potential decrease after retirement when using after-tax accounts, and then increasing again when Social Security and other benefits kick in. He highlighted the importance of strategic planning during the lower-tax period before required withdrawals, suggesting strategies like Roth conversions and managing account withdrawals to minimize future tax burdens and estate issues. Bryan emphasized the significance of withdrawal orders and discussed the need to understand how different accounts are taxed in retirement.
Retirement Account Tax Implications
Bryan explained the tax implications of different retirement account types, including taxable brokerage accounts, US retirement accounts (traditional IRA and 401(k)), Roth accounts, and Canadian accounts (RRSPs and LIRAs). He noted that US retirement accounts require paying taxes on withdrawals, while Roth accounts provide tax-free growth and withdrawals. For Canadian accounts, Bryan explained that withdrawals typically result in 15-25% withholding in Canada, which needs to be reported on US tax returns and claimed as foreign tax credits.
Blended Withdrawal Strategy Planning
Bryan explained that the traditional withdrawal strategy of taking money from after-tax accounts first can lead to tax issues later in life, particularly when combined with retirement accounts and Social Security benefits. He described how this approach can create problems for surviving spouses and highlighted the importance of considering a blended tax rate. Bryan recommended a blended withdrawal strategy that incorporates both brokerage and Canadian accounts to better utilize lower tax brackets while avoiding future tax penalties.
RRSP and LIRA Withdrawal Strategy
Bryan discussed withdrawing money from RRSPs and LIRAs immediately upon retirement to avoid potential tax complications and inheritance issues. He explained that this approach is typically recommended unless clients specifically want to focus on early Roth conversions, in which case RRSP and LIRA withdrawals might be delayed to allow for more Roth conversions.
Cross-Border Retirement Strategy Optimization
Bryan discussed a case study of a client with various retirement accounts across different countries and explained a strategic approach to withdrawals to maintain low tax brackets over the long term. He described how they structured withdrawals from Canadian RRSPs, US IRAs, and taxable brokerage accounts to optimize tax efficiency, emphasizing that there is no universal rule for withdrawal strategies and each person’s situation needs customization. Bryan concluded by encouraging listeners to schedule a complimentary consultation with a cross-border financial advisor through RetireMitten.com.