Retirement in Canada vs. America: An Overview
American and Canadian governments provide many of the same types of services for people who have reached the age of retirement but Canadian retirees have fewer worries than their American counterparts. They enjoy a more generous retirement system.
The poverty rate for Canadians over age 65 was 4.7%, according to Canada's 2021 Census of Population released in November 2022. That's lower than any other age group in the country and half the poverty rate for U.S. citizens of the same age. American retirees may need ways to supplement their retirement incomes due to their lower incomes and the risk of running out of money.
Key Takeaways
- The Canadian Registered Retirement Savings Plans and the Tax-Free Savings Account are similar to U.S. traditional and Roth IRAs.
- Canadian retirement accounts have more generous contribution limits and fewer distribution limits than American accounts.
- Old Age Security (OAS), one of the three types of pension plans in Canada, is funded by general tax revenues, unlike Social Security in the U.S.
- The Canada Pension Plan is funded by payroll taxes, much like Social Security in the U.S.
- Canada's single-payer health insurance is available to citizens throughout their lives.
- America's Medicare is eligible only to those 65 or older and it covers a lower percentage of medical costs.
A major benefit for Canadians is the publicly funded universal health care system which provides them with essential medical services throughout their lives, as well as in retirement. It has no copays or deductibles.
In contrast, Americans have no single-payer insurance unless they're disabled or extremely low-income until they reach age 65 when they can qualify for Medicare. Medicaredoesn't cover most costs for vision, dental, or hearing care. About one in five Medicare recipients reported paying more than $2,000 in out-of-pocket expenses in a 2021 Commonwealth Fund study.
A 2022 study by the Employee Benefit Research Institute estimated that some retired couples with particularly high prescription drug costs will need approximately $383,000 to comfortably afford Medicare premiums and out-of-pocket medical expenses in retirement.
Key Differences: Retirement Savings Plans
Canada and America both offer individuals similar retirement financial vehicles with similar tax advantages.
Contribution Limits: RRSP vs. Traditional IRA and 401(k)
Registered Retirement Savings Plans (RRSPs) allow investors to receive a tax deduction on their yearly RRSP contributions in Canada. Money invested in the plan grows tax-deferred and this 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 CA$30,780 in 2023 and CA$31,560 in 2024.
Investors can contribute more but additional sums over $2,000 will be hit with penalties.
Traditional IRAs
Traditional individual retirement account (IRA) contributions in the United States are more limited than their Canadian counterpart. The Internal Revenue Service (IRS) has set the maximum contribution for traditional IRAs at $7,000 per year for 2024 or the amount of your taxable compensation for the taxable year, whichever is less. People aged 50 and over can sock away an additional $1,000 per year in 2024 as part of a catch-up contribution.
IRAs carry a 10% tax penalty if funds are withdrawn before the taxpayer reaches the age of 59½ but there's a special exemption at the age of 55 called the 72(t) that allows distributions without penalty.
Defined Contribution Plans
Defined contribution plans include American 401(k) plans, offered through an employer. They're more comparable to RRSPs. The annual contribution limit for 2024 is $23,000 and those who are age 50 and over can contribute an additional $7,500 per year for a total of $30,500.
IRA Contribution Age and the SECURE Act
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed by former President Trump in December 2019. The Act eliminates the maximum age for traditional IRA contributions, which was previously capped at 70½ years old.
However, Americans who reached age 70½ in 2019 still had to withdraw their required minimum distributions (RMDs) in 2020 or they incurred a hefty50% penaltyof their RMD. Those who reached age 70½ in 2020 are not required to withdraw RMDs until they reach age 72.
The first withdrawal must occur before the following April 1 so individuals who reached age 70½ in 2019 could have waited to withdraw their RMD until April 1, 2020. They were then required to take another RMD by the following Dec. 31 and every Dec. 31 thereafter. RMDs are required at age 72.
Congress passed SECURE 2.0, a revision to the Act, at the end of 2022. The age at which RMDs are required was raised to age 73 in this legislation for people born between 1951 and 1959 and to age 75 for those born in 1960 or later.
Withdrawals and Taxes
Withdrawals from an RRSP can occur at any time but are classified as taxable income subject to withholding taxes. The RRSP must be either cashed out, used to purchase an annuity, or transferred into a Registered Retirement Income Fund (RRIF) in the year in which the taxpayer reaches age 71.
Traditional IRAs and 401(k)s are structured to provide the same sorts of benefits to American taxpayers. Contributions are tax-deductible and capital gains are tax-deferred. Withdrawals or distributions are taxed at the individual's income tax rate, however.
Canada's TFSA vs. America's Roth IRA
Canada's Tax-Free Savings Account (TFSA) is similar to the Roth IRA in the United States. Both of these retirement-focused vehicles are funded with after-tax money. There's no tax deduction in the year of the contribution but both accounts offer tax-free earnings growth and withdrawals are not taxed subject to certain rules.
Contribution Limits for TFSAs and Roth IRAs
Canadian residents over the age of 18 can contribute up to CA$7,000 to TFSAs in 2024.
The annual maximum contribution to a Roth IRA is $7,000 for 2024 or $8,000 with the $1,000 catch-up contribution for those age 50 and over. There's no limit on when one must stop making contributions and begin withdrawing money with either of these accounts.
Advantages of TFSAs Over Roth IRAs
TFSAs offer two significant advantages over Roth IRAs. Young Canadians saving for retirement can carry over their contributions to future years but such an option isn't available with Roth IRAs. If a taxpayer has reached age 35 and is unable to contribute CA$7,000 into their account due to an unforeseen outlay, the total allowable amount accumulates to CA$14,000 in the next year.
Thecontribution limits have changed year-to-year since the TFSA was first introduced in 2009. The limit sometimes sets at different ranges between $5,000 and $10,000. Thecumulative limitfor 2024 wasCA$95,000.
Sums equivalent to contributions can be withdrawn at any time but distributions of earnings out of Roth IRAs must be classified as "qualified" to avoid taxes. Qualified distributions are those made after the account has been open for five years and the taxpayer is either disabled or at least age 59½.
Canada's plan does offer more flexibility in terms of providing benefits for those who are planning retirement.
Key Differences: Government Pensions
Both the United States and Canada provide workers with a guaranteed income when they reach retirement age but these federal pension plans differ from each other in several ways.
Canada's Old Age Security
Canada has a three-part system:
- Old Age Security (OAS), financed by Canadian tax dollars, provides benefits to eligible Canadians who are at least 65 years of age.
- The Canada Pension Plan (CPP) is funded by payroll deductions like Social Security in the United States. It makes benefits available as early as age 60.
- The Guaranteed Income Supplement (GIS) is available to the very poorest Canadians.
OAS provides benefits to eligible citizens who have reached age 65. Complex rules determine the amount of the pension payment but an individual who has lived in Canada for 40 years after turning 18 is typically qualified to receive the full payment as of October through December 2023. The full payment is CA$707.68 per month from the age of 65 to 74 and CA$778.45 when they reach age 75.
Allowances of CA$1,343.94 and Guaranteed Income Supplements of CA$636.26 or CA$1,057.01, dependent on marital status, were provided for pensioners with annual incomes of up to CA$39,648 from October through December 2023.
The OAS implements a clawback provision known as the OAS recovery or repayment. High-income earners over the age of 65 are required to repay some or all of the OAS pension. This clawback is adjusted annually for inflation and varies by reported income.
OAS beneficiaries who choose to delay receiving benefits can get higher payouts, much like with Social Security. Benefits can be delayed for up to five years up to age 70. OAS benefits are taxable income and can carry certain payback provisions for high-income earners.
Canada imposes higher income taxes on its citizens than the United States does on its residents to subsidize universal health care and pensions.
Social Security
American Social Security benefits don't focus exclusively on providing retirement income. They encompass additional assistance including 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 factors such as the recipient's marital status and whether income was generated from other sources. Information provided in the IRS Form SSA-1099 will determine the tax rate for the benefit.
Canada's retirement programs are generally considered safe because they're funded out of general tax revenues. There have been continuous fears that the United States Social Security system, which is instead funded through payroll taxes on employee wages, will become underfunded.
Individuals are eligible to receive partial benefits when they reach age 62 and full benefits when they reach age 66 or 67, depending on their years of birth.
Eligibility is determined through a credit system. 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.
Can a Canadian Retire Full Time in the U.S.?
A Canadian citizen cannot retire full-time in the U.S. without going through the proper immigration channels. There are ways that a Canadian can retire part-time in the U.S., however, because they're legally permitted to spend six months a year in the U.S. without needing visas/permits.
Can You Collect U.S. Social Security in Canada?
Yes, a U.S. citizen can collect Social Security if they live in Canada or anywhere else outside of the U.S. other than a small number of restricted countries as long as they're eligible for Social Security.
Does Canada Tax U.S. Retirement Income?
Yes, Canada taxes U.S. retirement income but Social Security is only taxed in the country of residence. That income will be taxed in Canada, not the U.S., if you receive U.S. Social Security income and live in Canada. U.S. pension income will be taxed in both the U.S. and Canada but the U.S. portion is available as a foreign tax credit in Canada.
The Bottom Line
The American and Canadian systems provide many similar benefits to retirees with similar types of tax-advantaged accounts that allow people to save for retirement. But Canadian retirees enjoy a lower poverty rate than those on the other side of their border thanks to a universal health care system and more generous benefits.
