Registered Retirement Savings Plan For American Expats In Canada

Registered Retirement Savings Plan For American Expats In Canada

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (advice@adamfayed.com) or WhatsApp (+44-7393-450-837).

This article is not tax or any other kind of advice, and the facts might have changed since we first penned this article.

Introduction

The term “registered retirement savings plan,” or simply “RRSP,” doesn’t seem particularly enticing. Yet it is!

RRSPs are the unsung heroes of Canadians’ contemporary retirement preparation. These are genuine contemporary miracles that eliminate taxes and improve retirement.

Here is everything you need to know about Registered Retirement Savings Plan.

What Is A Registered Retirement Savings Plan?

In Canada, both workers and independent contractors can save for and invest in their retirement through Registered Retirement Savings Plans (RRSPs).

The remaining unused contribution room from 1991 onwards is carried forward continuously if a contributor does not complete the maximum permitted contribution. People can make up for years where they did not contribute the maximum amount to their RRSPs by doing this.

When pre-tax funds are invested in a Registered Retirement Savings Plan, they grow tax-free until they are withdrawn, at which point they are subject to marginal tax rates. Registered Retirement Savings Plans and 401(k) plans in the US have many characteristics, but there are also some significant variances.

An RRSP’s growth is governed by its contents. Merely putting money in an RRSP does not ensure that you will be able to retire comfortably, but as long as the money is not taken, it does ensure that the assets will grow tax-free.

When pretax funds are invested in a Registered Retirement Savings Plan, they grow tax-free until they are withdrawn, at which point they are subject to marginal tax rates. This is a savings vehicle intended to fund retirement.

The ability to contribute to an RRSP at any time, the fact that the contribution is tax deductible, and the fact that the contribution can be made in cash or in kind all make for a fantastic chance to lower income taxes.

In 1957, the Canadian Income Tax Act introduced the first Registered Retirement Savings Plan.

The Canada Revenue Agency (CRA), which establishes guidelines for yearly contribution caps, contribution timing, and the types of assets that are permitted, is in charge of regulating and supervising them since they are registered with the Canadian government.

What Investment Accounts Can An Expat Hold In An RRSP?

A person’s RRSP can contain a wide range of investments, including cash, GICs, and REITs. Other forms of investments and investment accounts that RRSP allows include:

• Mutual funds
• Equities (Stocks)
• Exchange-traded funds
• Bonds
• Mortgage loans
• Savings accounts
• Income trusts
• Foreign currency
• Guaranteed investment certificates
• Labor-sponsored funds

The types of assets that can be deposited into a Registered Retirement Savings Plan are not restricted for investors who are American citizens or green card holders living in Canada.

This implies that as long as they are held in an RRSP, they are free to hold Canadian mutual funds and ETFs without being subject to PFIC limitations.

Because there isn’t the same tax benefit as with Canadian dividends, it makes sense to hold investments in the US in a Registered Retirement Savings Plan that produces dividends.

What Are The Types Of RRSPs?

RRSPs may be divided into three categories. Although while individual RRSPs are the most popular, you might prefer the spousal or group choices.

1. Individual RRSP

A registered account in your name is known as an individual RRSP. You own the investments kept in the RRSP as well as the tax benefits related to them. Working with an advisor or creating and managing your own self-directed Registered Retirement Savings Plan investing account are also options.

2. Spousal RRSP

A spousal RRSP is one that is set up in your name and the name of your spouse or common-law partner.

Notwithstanding your contributions, they are the ones who own the RRSP’s investments. All payments you make to a spouse’s RRSP are tax deductible.

Your annual RRSP deduction cap is decreased by any contributions you make. They won’t have an impact on how much money your spouse can put into their own Registered Retirement Savings Plan.

To divide your retirement income more fairly with your spouse, consider opening a spousal RRSP.

It follows that the total income tax your couple pays may be less than what it would be if all of their investments were concentrated in a single RRSP.

If your income is more than your spouse’s and you anticipate paying a higher tax rate when you both retire, you might want to consider doing this. Alternatively, if you and your spouse both have pension plans but your spouse doesn’t.

You must meet the following requirements when applying for a spousal RRSP:

• a couple that has been living together for at least a year,
• have a kid together through adoption or birth, or
• share parental responsibility for and financial support of your partner’s children from a prior union.

If your spouse withdraws money from your account:

• You will be taxed on the withdrawal amount within three years after the contribution date.
• Your spouse will be taxed on the withdrawal amount three years from the contribution date.

In the event of a separation:

• In general, married couples must split their assets equally.
• Consider creating a joint agreement to address this problem if you are living together as a common-law couple because the division of assets may not always be equal.

Equilibrating retirement income and reducing taxes are goals of spousal RRSPs. If your spouse’s salary when you retire will be about equal to your own, it makes little sense to create a spousal RRSP.

3. Group RRSP

In order to encourage employee retirement savings, several firms provide group RRSPs as a bonus. Even when you create an individual RRSP, your company makes the contributions. In the same financial institution, all of the workers’ RRSPs are kept. It works as follows:

• Usually, your pay is immediately withdrawn for your plan contributions. Your employer could increase or match your contributions.
• Often, your employer covers the costs associated with setting up and running the plan. All investing fees are your responsibility.
• The investment alternatives are often restricted, however this varies on where the group RRSP is kept.
• According on your company, different regulations apply to the timing and amount of withdrawals from the plan.

It’s critical to comprehend the operation of your group RRSP. Depending on your company and the location of the plan, different restrictions and options apply.

Self-directed RRSPs

You may choose and manage the investments either in an individual or spousal RRSP more actively if you have a self-directed RRSP account.

Investment companies provide self-directed RRSPs, including bargain and full-service brokerage businesses.

Under a single self-directed plan, you are allowed to own a wide variety of investments. This facilitates maintaining your preferred asset mix and keeping track of your assets.

A self-directed RRSP is for you if any of the following applies to you:

• you want to have access to a variety of investment options
• you are an experienced investor
• you can manage your investments well

Make sure you are aware of all the costs associated with creating and maintaining your self-directed RRSP. You could have to pay a setup cost, an annual trustee fee, and commissions or sales fees when you purchase and sell investments.

Also, you might need to pay a charge for investment management or counseling. At a cheap brokerage, commissions are probably lower, but you’ll need to feel confident making investing decisions on your own.

What Is The RRSP Contribution Limit?

Your annual RRSP contribution limit is combined with any “carry-forward” contribution capacity from prior years to determine the total amount you are permitted to contribute.

The 2023 RRSP contribution cap is set at 18% of your earned income as recorded on your tax return for the prior year, up to a maximum of $31,560. The amount capped at $30,780 for 2022. 

The Canada Revenue Agency (CRA) permits you to carry forward any unused contribution room forever and add it to the amount you may contribute in subsequent years if you don’t contribute the maximum permitted amount to your Registered Retirement Savings Plan in any given year.

If you have a corporate pension plan about how your RRSP contribution limit is affected. In your notice of assessment, your yearly contribution cap and any available carry-forward contribution capacity are also listed.

What Are The Benefits Of Having A Registered Retirement Savings Plan?

Retirement savings through an RRSP provide a number of benefits. Compared to a savings account, it offers the following benefits:

1. Tax-deductible Contributions

Your RRSP contributions lower your taxable income. As a result, your tax bill may be lower or you may be eligible for a greater refund.

By excluding your RRSP contributions from your yearly income, you can immediately reduce your tax burden. In reality, pre-tax funds are used to pay for your contributions.

2. Tax-free Savings Growth

If the money in your RRSP is kept there, you are not taxed on any interest or investment gains you make.

3. Income Tax Deferral

You won’t have to pay taxes on your RRSP contributions since they are made using pre-tax money until you take the money out of the plan. This covers both your donations and the returns on your investments.

Your marginal tax rate will probably be lower in retirement than it was during your contributing years for the majority of Canadians with modest to high earnings.

As a result, when you withdraw the money, you probably pay less tax than you would have done while you were working.

4. You may turn your RRSP into a monthly income stream upon retirement.

When you retire, you can transfer your RRSP funds tax-free into a Registered Retirement Income Fund (RRIF) or an annuity. In retirement, if your tax band is lower than it is now, you’ll pay less tax on the monthly income you receive each year.

5. Your overall tax liability may be decreased by a spouse’s RRSP.

Contributing to a spousal RRSP if you make more money than your spouse can help them accumulate tax-free savings.

Then, you and your partner will get retirement income that is distributed more equitably. Your overall tax burden might be decreased as a result.

6. Your RRSP can be used as collateral to obtain a loan to fund your schooling or purchase your first house.

Under the Home Buyers’ Plan, you are permitted to withdraw up to $35,000 as a down payment on your first house (HBP).

Under the Lifelong Learning Plan, you can also withdraw up to $20,000 to cover your spouse’s or your own educational expenses (LLP). As long as you return the money within the deadlines, you won’t owe taxes on these withdrawals.

Are RRSPs Double-Taxed?

As a result of the Canada/US Tax Treaty’s recognition of RRSPs, investors won’t be subject to double taxation or extra tax reporting.

Contributing to an Registered Retirement Savings Plan is an excellent choice for investors who are Canadian workers since it lowers the amount of Canadian taxes owed in the year the money was earned.

Taxes would be postponed and only be due when funds were withdrawn from an RRSP. Ideally, the investor will be in a reduced marginal tax band when the money is withdrawn.

The fact that investments maintained under RRSPs can grow tax-free until withdrawn is another significant benefit.

RRSPs vs 401(K)s

The governments of the United States and Canada created the 401(k) and RRSP plans, respectively, to give citizens a tax-deferred opportunity to save for and increase their retirement income.

A 401(k) and an RRSP both have yearly contribution caps. The maximum contribution amount for an RRSP is determined by the individual’s earned income from the preceding year, and it can be carried over forever.

A 401(k) cannot be carried over and has a fixed annual amount regardless of income. The 401(k) has a “catch up” option that allows those who are over 50 to make more contributions.

In contrast to a Registered Retirement Savings Plan, which simply has withholding taxes and carries no penalty, a 401(k) carries a 10% penalty for early withdrawal.

An employer can set up a 401(k), but a bank or other financial institution can set up an RRSP. An RRSP established by a workplace in Canada is known as a group retirement savings plan, or GRSPS.

Can A Canadian Expat In The US Contribute To An RRSP?

You are not permitted to make contributions to a Registered Retirement Savings Plan (RRSP) account if you are a Canadian citizen who works and resides in the United States.

The guidelines for RRSP contributions allow you to deposit a specific portion of your earnings into your account. Your income, however, is not from a Canadian source because you are employed and live in the US, thus you are not entitled to any tax breaks in that country.

While residing and working in the U.S. prohibits you from making RRSP contributions, you are still permitted to maintain your Registered Retirement Savings Plan and let your investments grow tax-free in Canada.

You have the option to file a tax return if you live in the United States and want to postpone paying taxes on income from your RRSP assets until you take the money.

Can US Expats Living In Canada Contribute To An RRSP?

Dual citizens and expats are eligible to open an RRSP account inasmuch as they accumulated room. The RRSP, however, must be changed into an RRIF account at age 71, and after you turn 72, you must begin drawing distributions.

Despite similarities between a Canadian RRSP and an IRA, converting an IRA to an RRSP involves certain challenges.

You would have to top out the Registered Retirement Savings Plan with money from other sources because withholding taxes apply in the United States.

If the investor does not have the money to top off the RRSP, they risk losing this flexibility indefinitely and will be subject to Canadian tax on the difference between the value of the IRA and the amount donated to the RRSP.

When To Buy An Annuity Or Convert An RRSP To An RRIF?

By the end of the year they reach 71, an individual must either convert their RRSP into an RRIF or buy an annuity. They must begin receiving income the next year rather than the year they turn 71.

The most popular choice is an RRIF since it provides so much flexibility. The quantity and frequency of income as well as investment decisions are made by the person.

In accordance with their circumstances, they can also adjust things along the route. Apart from the minimums imposed by the federal government, an individual can adjust to their income requirements.

The recipient will get the remaining RRIF assets upon their demise. If it is to a spouse, there won’t be any tax consequences; but, if it is to another beneficiary, it will be reported as income on the estate’s final tax return.

An insurance plan called a life annuity aids someone in turning their money into a pension.

An investor would give the insurance business their money, and the insurance company would pay out a fixed income that would be guaranteed for the remainder of the investor’s life.

The income will end after they pass away. There are several different annuity kinds. The guarantee is the main justification for choosing an annuity over an RRIF.

The main drawback is that there is no flexibility and the money is locked up.

The duration of the income distribution is the primary distinction between a life annuity and a fixed-term annuity.

A fixed-term annuity is for a predetermined period of time, such as 5, 10, or 20 years, whereas a life annuity is for the recipient’s whole lifetime.

What Happens To Your RRSP If You Have An Employer-Sponsored Pension Plan?

In this scenario, the pension adjustment lowers your RRSP contribution limit. Your employer computes the pension adjustment, which is then annually reported on your T4 to the CRA.

Your pension adjustment is equal to the sum of your and your employer’s payments to the plan, whether you have active membership in a defined profit sharing plan (DPSP) or defined contribution registered pension plan (RPP).

If your RPP has defined benefits, the pension adjustment is calculated using a method that takes into account the right to pension benefits you accrued during the year.

What Happens To Your RRSP If You Close It At Age 71?

The complete amount of an individual’s RRSP would be contributed to their income and taxed in one year if they were to shut it out at age 71. As the government would receive a large portion of a person’s income right away, this is typically not the ideal choice.

Final Thoughts

Employees and independent contractors in Canada have access to Registered Retirement Savings Plans (RRSPs), a retirement savings and investment vehicle. These resemble American retirement plans like 401(k)s and IRAs in many respects.

When funds are taken from a Registered Retirement Savings Plan, they are subjected to marginal tax rates even if they were contributed on a pre-tax basis and grew tax-free up until that time.

RRSPs include a number of tax benefits, including tax-deferred growth of assets and the potential for participants to deduct contributions from their income.

A wide variety of investment options in Canada, like as mutual funds, exchange-traded funds, individual stocks, and bonds, are allowed under an RRSP. There are also many types of RRSPs, including individual, spousal, and group plans.

The Canadian Revenue Agency (CRA) establishes the maximum amount that can be contributed to an Registered Retirement Savings Plan, taking the contributor’s earned income into account.

Working with a financial planner is crucial if you have a green card or dual citizenship. You’ll get a lot of frustrations, time, and money saved.

You may minimize your tax obligation by bringing over your retirement assets from the US with the aid of a financial planner, who can also help you avoid costly mistakes.

They may provide guidance on avoiding major tax, estate, and financial pitfalls that Americans may encounter while relocating to Canada.

Your financial planner will make sure you get the most of the available international tax credits and will prepare your tax returns to assist you avoid paying hefty IRS fines.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.