US citizens can hold taxable accounts in Canada with Canadian brokerages. For more on choosing a brokerage see this page.
Many Canadian brokerages will let you hold funds in both US dollars and Canadian dollars. This is very helpful, since your US brokerage will almost certainly not allow you to continue holding a taxable account once you move. With a US dollar account at a Canadian brokerage, you can simply transfer your US holdings in (a non-taxable event). Thus, we continue to hold the same US ETFs in our taxable account as Canadian residents (VTI and VXUS).
In the Canadian dollar taxable account, you need to be more careful. Canadian-domiciled mutual funds and ETFs are considered Passive Foreign Investment Companies (PFICs) and, as such, are punitively taxed by the IRS and have onerous filing requirements. Thus, I avoid them.
Our first plan for extra Canadian dollars is to use them to pay off our mortgage. We got a 5 year mortgage when we moved up here (mortgages work differently in Canada) and I suspect interest rates may be higher when the time comes to renew. If they are, we’ll pay off most (if not all) of our mortgage. After that, our plan for our Canadian taxable account is to invest in individual Canadian stocks. This violates my general investing approach, but I’m OK with it for a couple of reasons. For one thing, this will not likely be a large portion of our portfolio — it is currently less than 1%, and I’d be very surprised if it was ever over 5% as I don’t anticipating working full-time for many more years. In addition, Canadian dividends are taxed favorably in Canada, so my plan is to invest in a few of the “dividend aristocrats” to take advantage of this.
If I were early in my accumulation phase, I would consider converting money to USD and investing them in US-domiciled ETFs. And if this was my plan, and I was going to be doing a lot of currency conversion, I would probably try to optimize it.
RRSPs are tax-deferred retirement accounts where you put pre-tax dollars and gains are not taxed until withdrawal, at which time withdrawals are taxed as income. Generally speaking, the amount you can contribute each year (aka your “RRSP room”) is 18% of your taxable income from the previous year. Thus, your first year in Canada, you won’t have any RRSP room and can’t contribute to it. Here are a couple of key points about RRSP room that may not be obvious at first glance:
- If your RRSP has an employer match, the employer’s portion also counts against your room. So, assuming your salary remains static, if you had a 6% employer match, you could contribute 12% (which the employer contribution of 6% would bring up to the 18% match).
- You can use some of your RRSP room to fund a spousal RRSP (for your spouse). This can be useful if one person earns more than the other — the higher earner can both lower their taxes now (by contributing to the RRSP) and also help make withdrawals in the future more balanced.
- The RRSP calendar goes from March 1 to February 28. In other words, if you contribute in January or February 2021, it counts towards your 2020 room.
- You are forgiven up to $2000 of over contribution.
RRSPs are an available account for US citizens, as they are recognized as a retirement account by the IRS. To avoid double taxation, you need to do an election on form 8891 to defer the US income tax on the RRSP investment until withdrawal.
Here’s how we use RRSPs:
- I contribute 6% of my salary to get the 6% match offered by my employer. I don’t contributed more than 6% here because the offerings aren’t good (with MERs around 1.3%).
- Early in the year, I use my remaining room (remembering to forecast my January and February contributions which will count against the previous year) to make a contribution to a spousal RRSP for my wife. I do this as a way of balancing our income because I make more money.
- My wife contributes up to her own RRSP room limit to her RRSP.
Unlike an IRA, there isn’t a minimum age for RRSP withdrawals. RRSPs mature the last day of the calendar year that you turn 71. At that time, you can 1) take a lump sum withdrawal 2) roll it into an RRIF, from which you would make annual minimum withdrawals or 3) purchase an annuity.
It is possible to roll an IRA into an RRSP, but the US withdrawal will be taxed. This means that at least 15% (and possibly more, depending on your tax rate) will be withheld, plus an additional 10% if you are under the age of 59.5. All of this would be available as a foreign tax credit (if you had enough taxes to offset it) but you’d have to make up the difference at the time of rollover or else only contribute the portion of your IRA left over after taxes. You wouldn’t be able to top it up later as it has to be done all at once to avoid counting against your RRSP room.
Personally, I haven’t really gone into the weeds on a rollover, but I may look more into it as I have a 403(b) and it might be a way to access it without the age restriction. At the same time, we also have a taxable account and 457(b)s so the plan is to save the 403(b) until later anyways. Here is some more info on rolling a 401(k) or an IRA into an RRSP.
The next several account types are more complicated for US citizens and you may want to avoid them.
A TFSA is a retirement account where you invest post-tax dollars and withdrawals are tax free. There is no minimum age for making a withdrawal. Unlike RRSPs, the room available is not connected to your income — every Canadian simply gets a certain amount of room per year ($6000 in 2020) and this room is cumulative (unlike, for example, an IRA where if you don’t use your annual space you lose it). In short, TFSAs sound like a great option for folks who are earning at a level where it makes sense to pay their taxes now (rather than deferring them to retirement).
Unfortunately, the IRS doesn’t recognize them. This means that the US will tax the gains on this account. This isn’t necessarily a deal breaker, as the taxes may be offset elsewhere, but so far I haven’t availed myself of a TFSA. According to my tax person, these start to be worth it once you have a decent amount of room (say ~25000K). We’re nearing that, so after this tax season I’m planning to have that conversation with him.
An RESP is an account aimed at saving for a child’s education (like a 529 in the US). However, similar to a TFSA, it is taxable for US income tax purposes. Thus, this isn’t something we’re using.
US Account Types | Table of Contents | Moving Money Across the Border