As a cross-border financial planner I get one question the most often, “Am I better off retiring in the U.S. or Canada?” Now, there are many non-financial benefits of retiring in both countries. You may have family back in Canada that you would like to live closer. Certainly, the weather in the U.S. is typically a little better, especially in the Winter. However, if weather is a consideration, I would keep on driving past Michigan, unless you have an affinity for shoveling snow. This article addresses some of the financial ramifications of retiring in the U.S. vs. retiring in Canada.
U.S. vs. Canada Tax Rates
There is no question that one of the biggest advantages of retiring in the U.S. is lower taxes. This isn’t just federal taxes, state taxes here in the U.S. tend to be much lower than provincial taxes. If you are a person that just hates paying taxes, you may want to consider retiring here in the U.S.
I’m not going to get into all the tax rules in both the U.S. and Canada, however, let’s look at the Federal tax brackets.
U.S. Tax Rates
Source: Tax Foundation
Canadian Tax Rates
|Individual Taxable Income Over (Canadian $)||Tax Rate|
Comparing U.S. vs. Canadian Tax Rates
It is somewhat hard to compare U.S. vs. Canadian tax rates because in Canada everyone pays taxes on an individual nature. Here in the U.S. if you are married, you will typically file a joint tax return with your spouse.
Let’s just say that you have $100,000 in taxable income and you are single here in the U.S. Also, with the exchange rate, currently 0.75 CAD-USD, $100,000 in taxable income here in the U.S. equals $132,000 Canadian Dollars.
Here is the tax comparison of $100,000 US dollars ($132,000 Canadian Dollars) in the U.S. vs. Canada:
As you can see in the chart above, for $100,000 of U.S. taxable income, you would pay about $1,670 (U.S. dollars) more by residing in Canada than here in the U.S.
One thing to consider though is that U.S. tax rates are historically low. If there is no change, the current tax rates would revert higher in 2025. This could even out the tax rates and make the tax difference between living in the U.S. and Canada even smaller.
U.S. State Taxes vs. Canadian Provincial Taxes
As I mentioned above, there appears to be a small federal tax benefit of living in the U.S. vs. Canada. However, this is only half the story. U.S. state tax rates tend to be much lower than Canadian provincial tax rates. This can result in much lower U.S. taxes vs. Canadian taxes. For example, many of the people I work with live in Texas and Florida. Both of those states have no state income tax. In Canada, you could easily end up paying more than 10% in provincial taxes. This section addresses the difference between U.S. state and Canadian provincial taxes.
U.S. State Tax Rates
If there is one consistent thing about U.S. state taxes, it is that there is nothing consistent. For example, Texas and Florida have no state income taxes. Compare that to California, in which state taxes can exceed 10% for higher-income earners. Outside of the weather, this is why you find many retirees flocking to Texas and California. Here is a good article about the breakdown of taxes in all 50 states.
Canadian Provincial Tax Rates
Like the U.S., Canadian provincial tax rates can also vary significantly. The Canadian government has a nice website, that breaks down the tax rates in each province. Many provinces have tax rates that start at 10% and many will exceed 15%. Two of the most populated provinces, Ontario and British Columbia, have lower tax rates initially. However, both of those also exceed 10% by the time that you have C$100,000 in taxable income. Quebec’s tax rate starts at 15%.
There is no question that the big difference in U.S. and Canadian taxes are the state and provincial tax rates. You may find the difference to be 10% to 20% depending on the state or province that you live in. However, there is a reason that provincial taxes are higher, and for some, the higher tax rates may be worth it. These higher taxes help pay for healthcare in Canada.
U.S. vs. Canadian Healthcare in Retirement
Just recently a client of mine was retiring at 60 years old. As a dual citizen, she was trying to decide to retire in the U.S. or Canada. Her final decision? She would retire in both. She will live in Canada until age 65 and then move back to Texas at age 65. What is the reason for this strategy? It allows her to keep her healthcare costs low for her first 5 years of retirement before Medicare here in the U.S. begins. I won’t discuss which healthcare system is better in this post, however, you should expect to pay less in Canada than you will here in the U.S. for healthcare in retirement.
To qualify for Medicare, you must have worked and contributed to the U.S. social security system for 10 years. In those years, you must earn over a certain (link) amount each year for that year to count.
If you are eligible for Medicare, in 2019, the monthly premium cost of Medicare is $135.50. However, this could be higher if you earn over a certain amount of income. Most people will then purchase an additional supplement plan that can run you anywhere from an additional $25 to $200 per month. Truthfully, Medicare is good insurance for those over 65, at a reasonable price. You can also purchase Medicare if you haven’t met the eligibility requirement, but the costs will be much higher.
There are two main issues with U.S. Medicare:
- Medicare doesn’t start until age 65
- Even with Medicare, you can experience significant out of pocket costs
In the example above, I discussed a situation in which a client was going to move to Canada for 5 years after retirement. She was going to move to Canada to get Canadian provincial coverage and then move back to the states when she is eligible for Medicare. Trying to get healthcare here in the U.S. before age 65 if you aren’t covered by an employer, and you could face huge premiums. I have seen these premiums in the thousand dollars a month range.
The other issue with Medicare is that the out of pocket costs can still be significant. I was working with a couple that felt very comfortable with their retirement. However, there was one major issue. A drug that she was currently being prescribed was going to cost over $6,000 per year and there was no generic alternative. That can be a big hit for any retiree.
Canada Provincial Healthcare
Can I interest you in free healthcare? As an American, the idea of not paying astronomical prices for healthcare is unfathomable. This is the way of life for most Canadians. However, Canada’s universal health insurance may not be as universal as you may think.
Canada has a provincial healthcare system. This means that the amount of healthcare coverage that you have in Canada is determined by the province that you reside. Here is a good reference that shows what is covered for free in each province. Although you may be covered in one province, you may find another province does not cover the same procedure for free. For that reason, some people will purchase additional insurance to have greater coverage.
The qualification for coverage may also vary depending on the province. For example, here are the coverage requirements in Ontario under the Ontario Health Insurance Plan (OHIP):
To qualify for OHIP, you must meet all of the minimum qualifications listed below plus at least one of the additional requirements.
To meet the minimum qualifications, you must:
- be physically in Ontario for 153 days in any 12‑month period
- be physically in Ontario for at least 153 days of the first 183 days immediately after you began living in the province
- make Ontario your primary home
Also, it may take up to 3 months after an application to qualify for OHIP.
If you have a lot of healthcare costs and are looking to minimize these expenses, look no further than our neighbor up north.
Qualifying for U.S. and Canadian Retirement Benefits
A common question that I receive is, “Do I lose my social security benefits if I retire in Canada?” Certainly, you wouldn’t want to lose a big chunk of retirement income by making the wrong decision in which country to retire. However, the truth is that retiring in either the U.S. or Canada shouldn’t impact your Canadian or U.S. retirement benefits. The U.S. and Canada have a Totalization Agreement that helps a person qualify for U.S. and Canadian benefits no matter which country he retires. This post addresses the three main types of retirement benefits available in the U.S. and Canada. For a more thorough post on these benefits please read my article “Qualifying for U.S. Social Security, Canada CPP and OAS”.
Canadian Pension Plan (CPP)
It doesn’t matter if you retire in the U.S. or Canada, you will be eligible to collect your CPP in either country if you qualify for a CPP benefit. Qualifying for CPP is easy, as you just need to work and have contributed to the CPP for at least one year in Canada. If you live in the U.S., you can have your funds deposited into a U.S. bank in U.S. dollars.
There is another benefit of retiring in the U.S. and collecting your CPP; lower taxes. When you receive your CPP benefit in the U.S. there is no Canadian tax withholding and you are only subject to the favorable U.S. social security tax treatment.
Canadian Old Age Supplement (OAS)
Like the CPP, you may collect your OAS benefit in either the U.S. or Canada. However, unlike CPP, you may be able to qualify for your OAS easier if you retire in Canada. If you retire in Canada, you only need to have lived in Canada for 10 years after age 18 to collect a benefit in Canada. In order to collect your benefit outside of Canada, you will have needed to live in Canada for 20 years after age 18. However, the U.S. – Canada Totalization Agreement has made it easier to qualify for this 20-year residency requirement.
You can use your social security credits that you have earned here in the U.S. to help you meet that 20-year residency requirement. However, some people still don’t meet this 20-year residency requirement, and may consider moving back to Canada to receive their OAS benefit. However, we are talking about less than $300 per month Canadian typically so this may not sway your decision one way or another.
Also, there is another benefit of retiring in the U.S. if you have an OAS benefit. Typically, if you earn over a certain amount of money in Canada, your OAS benefit may be reduced or eliminated because of the OAS Pension Recovery Tax. In the U.S., this same tax is not applicable.
U.S. Social Security
Like your Canadian retirement benefits, there is not much difference in receiving your social security benefit in either Canada or the U.S. The U.S. – Canada Totalization Agreement makes qualifying for U.S. social security easier if you have lived and worked in both the U.S. and Canada.
In the U.S., you may qualify for social security under your spouse’s record, if you don’t qualify under your own benefit. If that is the case, typically you will have needed to live with your spouse for at least 5 years in the U.S. to collect a benefit in Canada if you are not a U.S. citizen.
The Exchange Rate
When my client Ken retired, he couldn’t wait to move back to Canada. His reasoning? “I get 32% more on my money in Canada than I do here in the U.S”, Ken excitedly replied. Ken had money in the U.S. and Canada. When he retired, the U.S. – Canadian Dollar exchange rate was 0.75. Meaning that when money moved from Canada to the U.S., he would only get 75 cents for every dollar that he brought over. However, if he moved his U.S. 401(k) to Canada, he would get a 32% boost to all the money he brought over. To him, this is a no brainer.
I will warn you that plying the exchange rate game is not as clear cut as it may appear. For example, you may get a boost by bringing money from the U.S. to Canada, however, things in Canada may also cost more. For example, in 2018 the average home price in Canada was $476,000 CAD and the average home price in the U.S. was $303,000. Also, we all remember when the U.S. dollar and Canadian dollar were at the same value not too long ago. The exchange rate may give you a temporary boost by bringing money to the U.S., but this may not be permanent.
Two of the main considerations between retiring in the U.S. vs. Canada is taxes and healthcare. Typically, you will pay less in taxes if you retire in the U.S. State taxes are especially going to be lower than Canadian provincial taxes. However, medical costs will typically be much lower in Canada compared to the U.S. This is especially true if you are considering retiring before age 65 and aren’t covered by Medicare or another group health insurance plan. Also, if you have assets in both the U.S. and Canada, the exchange rate makes it much more favorable to retire in Canada today rather than the U.S. However, this is always a variable that can change quickly.
Of course, the choice to retire in the U.S. or Canada tends to be much more complicated than just a financial decision. Proximity to family, friends, and quality of life tend to play a much bigger role. These are things that make it difficult to determine the true benefit of retiring in one country over the other.
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