Retirement in Canada vs. America: An Overview
American and Canadian governments provide many of the same types of services to those planning for retirement and those who have retired. Overall, however, Canadian retirees find life after work to be much less stressful, as fears of running out of money are not as prevalent as they are in the United States. Such fears drive some American retirees to find ways to supplement their retirement incomes.
- Canada and America both allow citizens to have tax-advantaged retirement accounts: the Canadian Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Account (TFSAs) are similar to the American Traditional IRAs and Roth IRAs, respectively.
- Canadian retirement accounts have more generous contribution limits and fewer distribution restrictions than their American counterparts.
- Canada's primary pension plan for seniors, Old Age Security, is funded by general tax revenues, while America's Social Security is funded by payroll taxes.
- Canada's single-payer health insurance is available to citizens throughout their lives; America's single-payer system, Medicare, is eligible only to those 65 and older and covers a lower percentage of medical costs.
- Canadians tend to pay more substantial income taxes than Americans.
A major benefit for Canadians is the publicly-funded universal healthcare system, which provides them with essential medical services throughout their lives, as well as in retirement, without co-pays or deductibles. In contrast, unless they are disabled or extremely low income, Americans have no single-payer insurance until they reach age 65, when they can qualify for Medicare. Even that is far from comprehensive. Medicare covers around 62% of healthcare costs. A 2018 study by the Employee Benefits Research Institute estimates that a 65-year-old couple, without employer health coverage, will require approximately $400,000 to comfortably afford Medicare premiums and out-of-pocket medical expenses in retirement.
Key Differences: Retirement Savings Plans
When it comes to saving for retirement, Canada and America both offer individuals similar financial vehicles with similar tax advantages.
Canada's RRSP vs. America's Traditional IRA
In Canada, Registered Retirement Savings Plans (RRSPs) allow investors to receive a tax deduction on their yearly contributions. Money invested in the plan grows tax-deferred, which advances the benefits of compounded returns. Contributions can be made until the age of 71, and the government sets maximum limits on the amount that can be placed into an RRSP account (18% of a worker's pay, up to $26,500 for 2019). According to the Canada Revenue Agency, that figure rises to $27,230 in 2020. Investors can contribute more, but additional sums over $2,000 will be hit with penalties.
Withdrawals can occur at any time but are classified as taxable income, which becomes subject to withholding taxes. In the year in which the taxpayer turns 71, the RRSP must be either cashed out or rolled over into an annuity or Registered Retirement Income Fund (RRIF).
For American taxpayers, a traditional IRA is structured to provide the same sorts of benefits, whereby contributions are tax-deductible and capital gains are tax-deferred until distributions out of the account are realized.
The new Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed by President Trump in early January 2020. The Act eliminates the maximum age for traditional IRA contributions, which was previously capped at 70.5 years old.
However, Americans who turned 70.5 years old in 2019 will still need to withdraw their required minimum distributions (RMDs) in 2020 or thy will incur a hefty 50% penalty of their RMD.Those turn 70.5 years old in 2020 will not be required to withdraw RMDs until they are 72. The first withdrawal needs to occur before following April 1, so individuals who turned 70.5 in 2019 can wait to withdraw their RMD until April 1, 2020. They will be required to take another RMD by the following Dec. 31, and every Dec. 31 thereafter.
IRA contributions are more limited. For 2019 and 2020, the IRS states that "the maximum contribution that can be made to a traditional or Roth IRA, is the smaller of $6,000, or the amount of your taxable compensation for the taxable year." People over the age of 50 can sock away an additional $1,000 per year in their IRAs. Also, IRAs carry penalties if funds are withdrawn before the taxpayer reaches age 59½."
In terms of contribution amounts, American 401(k) plans, offered through an employer, are more comparable to RRSPs: the annual maximum in 2019 is $19,500, or $26,000 for those over age 50. At May 2019 exchange rates, CAD $26,500 equals USD $19,585.
Despite the fact that RRSPs allow for greater contributions, wealthy Canadians tend to pay more taxes than their southern neighbors.
Canada's TFSA vs. America's Roth IRA
Canada's Tax-Free Savings Account (TFSA) is fairly similar to Roth IRAs in the United States. Both of these retirement-focused vehicles are funded with after-tax money (there's no deduction for the contribution), but they do grow tax-free, and withdrawals are not taxed. Canadian residents over the age of 18 could contribute up to $6,000 to TFSAs in 2019; if you're contributing in 2019 for the first time, you're eligible to deposit $63,500, provided you turned 18 in 2009 (the year the accounts originated). The annual maximum contribution to a Roth IRA is also $6,000, or $7,000 for those over the age of 50. Another similarity between these accounts: There is no limit on when one must stop making contributions and begin withdrawing money.
TFSAs offer two significant advantages over Roth IRAs. Young Canadians saving for retirement are able to carry over their contributions to future years, while such an option is not available with Roth IRAs. For example, if a taxpayer is 35 years old and unable to contribute $6,000 into their account, due to an unforeseen outlay, next year the total allowable amount accumulates to $12,000. The contribution limits have changed year-to-year since the TFSA was first introduced in 2009, with the limit sometimes set at different ranges between $5,000 and $10,000; the current cumulative limit for 2019 is $63,500.
Secondly, while sums equivalent to contributions can be withdrawn at any time, distributions of earnings out of Roth IRAs must be classified as "qualified" in order to avoid taxes. Qualified distributions are those made after the account has been open for five years, and the taxpayer is either disabled or is over 59½ years old. Canada's plan does offer more flexibility in terms of providing benefits for those planning for retirement.
Key Differences: Government Pensions
Both the United States and Canada provide workers with a guaranteed income once they reach retirement age. These federal pension plans differ from each other in several ways, however.
Canada's Old Age Security vs. America's Social Security
Canada has a three-part system: Old Age Security (OAS), financed by Canadian tax dollars, provides benefits to eligible Canadians 65 years of age and older; the Canada Pension Plan (CPP), funded by payroll deductions (like Social Security in the Unites States) makes benefits available as early as age 60; and the Guaranteed Income Supplement (GIS) is available to the very poorest Canadians.
OAS provides benefits to eligible citizens 65 years of age and older. Although there are complex rules to determine the amount of the pension payment, typically, a person who has lived in Canada for 40 years, after turning 18, is qualified to receive the full payment (as of 2019) of $601.45 per month. Additionally, Guaranteed Income Supplements ($540.77 or $898.32, dependent on marital status) and Allowances ($1,142.22) are provided for pensioners with an annual income between $18,240 and $33,744 annually. Much like with Social Security, OAS beneficiaries who choose to delay receiving benefits can get higher payouts; currently, benefits can be delayed for up to five years, up to age 70. OAS benefits are not considered taxable income, but they do carry certain payback provisions for high-income earners.
To subsidize universal healthcare and pensions, Canada imposes higher income taxes on its citizens than the United States does on its residents.
American Social Security, on the other hand, does not focus exclusively on providing retirement income but encompasses such additional areas as disability income, survivor benefits, and Medicare (to the extent that Medicare premiums are taken out of Social Security benefits). Social Security income tax issues are slightly more complex and depend on such factors as the recipient's marital status and whether or not income was generated from other sources; the information provided in the IRS Form SSA-1099 will determine the tax rate for the benefit.
Individuals are eligible to receive partial benefits upon turning 62 and full benefits ($2,861 per month is the maximum as of 2019) once they are 66 or 67, depending on the year of birth. Eligibility is determined through a credit system, whereby qualified recipients must obtain a minimum of 40 credits, and they can earn additional credits to increase their payments by delaying initial benefit payments up to age 70.
Generally, Canada's retirement programs are considered safer, as they are funded out of general tax revenues. There are continuous fears in the United States that the Social Security system, which is funded through payroll taxes on employee wages, will become bankrupt.