Financial Facelift for Dual Citizens: Navigating Cross-Border Retirement Planning

Sid, a 55-year-old Ontario government employee, and his wife Sherry, a 46-year-old financial services professional, are approaching a critical juncture in their lives. With an eight-year age gap, they are navigating the complexities of retirement planning as dual citizens with substantial savings and investments in both Canada and the United States. As they prepare for retirement, they want to understand the best ways to transition from saving to drawing down in retirement, and whether their current spending and investment choices need adjusting.

Key Takeaways:

• Sid and Sherry have more than enough to achieve their financial goals, thanks to their substantial savings, investments, and defined benefit pensions.
• As a U.S. citizen, Sherry should be mindful of tax rules related to gifting, home ownership, and estate planning, and ensure her investments do not include passive foreign investment companies (PFICs).
• Sherry's Roth individual retirement accounts (IRAs) can provide tax-free withdrawals in both Canada and the U.S. if specific requirements are met, including filing a one-time treaty election and refraining from contributions after becoming a Canadian resident.
• When Sherry retires in two years, their household income will drop, but they will still have a combined income of $154,253 per year before tax, or $112,000 after tax.
• When Sid retires in four years, their cash inflow will increase to $109,965 before tax, or $85,473 after tax, thanks to Sid's defined benefit pension and Sherry's casual employment income.
• The couple should consider tapping their registered retirement savings plans (RRSPs) early to cover large expenses and reduce the Old Age Security (OAS) clawback for the couple once they start taking government benefits.
• Income splitting on their Canadian tax filings will lower their combined tax burden, thanks to both receiving income from registered pension plans.
• To manage capital gains down the road, Sherry and Sid should consider gifting to their nieces and nephews, as gifting is limited to $19,000 per year for U.S. citizens.
• They should revisit their wills every five years or after a life event, as they could live another 40 years or so.

Statistics:

• Sid's defined benefit pension: $75,000 per year, indexed to inflation.
• Sherry's defined benefit pension: $7,653 per year, non-indexed to inflation.
• Household income before tax: $154,253 (when Sherry retires) and $109,965 (when Sid retires).
• Household income after tax: $112,000 (when Sherry retires) and $85,473 (when Sid retires).
• Roth IRA balance: $608,545.
• Gifting limit for U.S. citizens: $19,000 per year.
• Old Age Security (OAS) clawback: to be determined.

Sources:

• Janine Guenther, portfolio manager and certified financial planner at Bellwether Investment Management in Vancouver.
• The Globe and Mail.
• Various Canadian and U.S. tax laws and regulations.
• Sid and Sherry's financial statements and retirement planning documents.