Sheila was advised by her U.S. based financial planner to withdraw her RRSP, and bring it to the U.S. She thought it was a reasonable request. At only $100,000, the RRSP represented only a small part of her total retirement savings. Also, she didn’t like the fact that she paid higher fees on her investments inside the RRSP. However, when she finally got her check, she realized she had made a huge mistake. High taxes and a poor exchange rate nearly wiped out her RRSP. She was left with less than half the amount in her RRSP. Not to mention, she would get another nice surprise when she filed taxes this year.
In Cross-Border financial planning, small mistakes can have huge financial ramifications. This article discusses some of the biggest cross-border mistakes and how to avoid them.
Miss Out on Benefits
A woman recently called me after attending my webinar. She had worked in Canada until age 40, and then moved to the U.S. She is now 72, and happily retired living in Florida. The problem is that she never started collecting her Old Age Supplement (OAS) benefit. After listening to my webinar, she realized that she should be eligible for an OAS benefit. Given her situation, I confirmed that she should receive an OAS benefit. In fact, her OAS benefit would be over $600 per month given her age and how long she lived in Canada. A benefit that she didn’t even realize she had until reading through my website. She even had two financial advisors, one in Canada and one in the U.S., and they both missed this benefit as well. Now, OAS was paying for her car payment. Having benefits in two countries is confusing. Make sure that you understand all the benefits in which you qualify in both countries.
This article breaks down the different benefits you may qualify for in both countries: https://retiremitten.com/qualifying-for-both-u-s-and-canada-retirement-benefits-totalization-agreement/
Let WEP Wipe-Out Your Social Security Benefit
WEP is the dirty three-letter word of cross-border financial planning. Trying to determine the best time to turn on social security is difficult. Now, let’s add another benefit (CPP), a moving exchange rate, and this Windfall Elimination Provision (WEP). Good luck trying to determine a strategy with all of these variables. Here are some strategies that you can consider to reduce WEP and increase your social security and CPP benefit:
- Start CPP early and delay social security
- Start social security early and delay CPP
- Start social security at Full Retirement Age and delay CPP until age 70
All these strategies allow you to delay and grow at least one of your benefits and allows you to collect one of your benefits WEP free for a time.
for more information on WEP, please read my article: https://retiremitten.com/how-your-canada-pension-plan-cpp-impacts-your-u-s-social-security-benefit/
Don’t Have a Tax Strategy
If you have both U.S. and Canadian retirement accounts, not having a tax strategy is one of the biggest mistakes that you can make. Not having a tax strategy is very similar to a pilot flying blind. Sure, you can make some educated guesses, but you may be way off target. The goal is simple: A long-term retirement tax strategy that keeps your U.S. taxes low. This may be accomplished by:
- A Roth conversion strategy
- Selling appreciated stock when tax rates are low
- Tax-loss harvesting
- Taking advantage of available deductions
Many financial advisors focus solely on investment performance. We also focus on you keeping more of your hard-earned money. During our initial financial plan, we create a long-term tax strategy. We also review our clients tax returns each year and have a year-end tax planning meeting to see if there is anything else that we can do to keep more money in your pocket.
RRSP Withdrawal Problems
One of the reasons having a tax strategy is so important, is that it helps drive RRSP decisions. I mentioned a story at the beginning of the article about someone taking a RRSP distribution and getting pennies on the dollar. I unfortunately see this all the time. When it comes to RRSP distribution strategies, I have a simple philosophy: You want your tax withholding to match your U.S. tax brackets.
Let me give you an example. I was working with a client who had significant amount of RRSP savings as well as money that was already taxed (checking, savings, brokerage). He also had an IRA and a 401(k) that was a little smaller than his other assets. Another advisor suggested that he withdraw his RRSP and move it into his other accounts here in the U.S. The issue was that he was taking a withdrawal when exchange rates were poor and U.S. taxes are low. His current tax rate is 12% and he would be paying 25% on his RRSP withdrawals. We figured out a tax strategy which allowed us to keep his U.S. taxes low, in the 15% tax bracket. Next, we will convert his
RRSP to a RIF at age 71, and then pay the 15% tax withholding. This allows us to match his RRSP withholding tax with his U.S. tax rate. Ultimately, this will save him a significant amount of money in retirement on taxes.
Not Considering the Exchange Rate
First, let’s get this right out there. Trying to predict the future exchange rate is like predicting what will come out of my five-year old’s mouth next. It’s nearly impossible. However, that doesn’t mean that we shouldn’t consider the strength or weakness of the dollar to make some cross-border decisions. For example, right now the U.S. dollar is historically strong vs. the Canadian dollar. Bringing money over to the U.S. from Canada right now, and you will get about 76 cents on the dollar. So, given the current strong dollar, there are some strategies that we can implement.
- Delay taking CPP
- Delay OAS
- Delay RRSP withdrawals
- Draw from U.S. retirement accounts now, and delay Canadian retirement account withdrawals
As we all know, the exchange rate can change on a dime. Although right now taking Canadian retirement account withdrawals may not make sense, you need to constantly monitor the situation. In our on-going meetings each year with our clients we look at the exchange rate and make strategy changes if necessary.
Need More Help?
Are you missing out by working with a financial advisor that doesn’t fully understand your cross-border financial planning needs? Are you interested in working with a financial planner that specializes in your cross-border financial planning situation? Schedule a complimentary meeting below, and let’s create your cross-border financial plan.