National Post article: Is $15,000 for cross-border tax help too much?

The National Post asked me to look at the retirement plan for Rita, 61, and Darcy, 60, a Quebec couple who spent half their careers in the U.S. and the other half in Canada.

Most of their retirement money is still in U.S. employer plans, and they’ll both receive U.S. Social Security as well as Quebec Pension Plan benefits.

Darcy would like to retire within the next year, Rita plans to continue until 65, and they want to know whether their savings and pensions will comfortably support them.

They’re also wondering about the best way to manage their U.S. accounts, how Social Security will affect their Canadian benefits, and whether the $15,000 fee they were quoted for cross-border tax planning is reasonable, or if they’re overpaying for advice.

Some of the key questions we explore in the article:

• When cross-border planning becomes essential, and when it doesn’t.
• Whether or not it makes sense to transfer U.S. plans to Canada.
• How Social Security affects QPP/CPP and OAS.
• How much life insurance retirees actually need.
• Whether $15,000 is typical for this type of planning.

Cross-border retirement planning is complex, but once you know the rules, the right answer may be clear. This case shows how to simplify things so you can retire with confidence.

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

Is $15,000 for cross-border tax help too much?

Financial snapshot for the expert:

Income (all in Canadian funds)

● Employment income:

○ Darcy $150,000

○ Rita $45,000

● Investment income (dividends): $360 annually

● Pension (current or anticipated):

○ Darcy: $18,000 annually upon retirement

■ Ontario Teachers Pension Plan at 65: $3600

■ QPP at 65: $7200

■ Quebec Principals Pension Fund (PPMP) $7200

○ Rita; $9060 annually upon retirement

■ Ontario Teachers at 65: $4500

■ QPP at 65: $4560

● Other: Social Security How does this harmonize with CPP and QPP?

○ Darcy: $29,000 at age 62

○ Rita: $25,000 at age 62

Assets

● Primary residence approximate value: $700,000 ($230,000 remaining in mortgage at

3.75%)

● Rental property approximate value: nil

● Other: nil

Investment holdings

● Cash: $20,000

● TFSAs: $15,000

● RRSPs:

○ Darcy: $55,000

○ Rita: $43,000

● GICs: nil

● LIRA: nil

● RESPs: nil

● Mutual Funds: nil

● Stocks:

○ Rita: eTrade (US funds): $15,000

○ Rita: SunLife shares (Cdn funds): $9700

● Rental property: nil

● Other:

● USA 403(b) retirement plan for educators:

○ Darcy: $500,000 (USD)

○ Rita $450,000 (USD)

● Life insurance: type (i.e., term, whole) value:

○ Darcy: $500,000 term

○ Darcy: $350,000 while employed

○ Darcy $100,000 whole life

○ Rita: $150,000 term

○ Rita $100,000 whole life

Monthly expenses

$1600 Mortgage or rent payments

$360 Utilities

$1400 Groceries

$680 Transportation costs

$400 car loan

$180 public transit

$100 gasoline

$0 Child care: nil

$845 Insurance premiums

$600 life insurance

$125 auto

$120 home

$700 Home repairs (including plowing and lawn care as well as incidental repairs)

$0 Credit card payments: nil

$300 Property tax

$0 Loans

$900 Dining out/travel/entertainment

$740 Other?

$400 charity

$350 prescriptions and dental

FINANCIAL PLAN

For Darcy to retire next year and Rita at age 65, they need just over $1 million in investments. They are projected to have more than $1.6 million, so they are 44% ahead of their goal. They can confidently retire with a comfortable margin of safety. This assumes that they will be happy maintaining their current lifestyle through their retirement.

Question: 

“We’ve spoken to financial advisors who say we’ll be fine, but we’re worried our financial situation is so complicated we’ll make big mistakes,” said Rita. Part of their worry is that while Rita is a dual citizen, Darcy is not. He is a Canadian citizen. It is their understanding that if Rita pre-deceases Darcy, he would have to live in the US for six weeks a year to qualify for survivor benefits as a non-citizen. “Is this a cause for concern?” asked Rita.

Answer:

No, it is not a concern for them. US Social Security has an Alien Nonpayment Provision that non-US citizens living outside the US have to spend one month (not 6 weeks) in the US every 6 calendar months abroad. There is an exception for Canada in the US-Canada Totalization Agreement. If Darcy outlives Rita, as long as he lives in Canada or the US, he would continue to collect Social Security.

Question: 

“Should we move the U.S. accounts to Canada and put that money into RRSPs? What are the tax implications? Or should we start withdrawing from them? And if so, when and should I draw mine down first as my income is lower than Darcy’s?” asked Rita. “Our investment advisor has recommended a cross-border tax advisor to do an assessment, which will cost $15,000. Is this fee typical for this type of assessment?”

Answer:

Their US 403(b) retirement plan for educators are tax-free until they are withdrawn, but withdrawals or distributions are taxed. The tax-deferral is good. The disadvantage is that they often have fewer investment options, lower returns from annuity-heavy structures, and higher fees than other types of accounts.

They could withdraw some and contribute to an RRSP in Canada. This is probably a good idea, but only if they have RRSP contribution room in Canada. The withdrawal would have a 30% tax withholding, so they would need to find extra cash temporarily if they want to offset the tax. For example, if they withdraw $100,000, they would get $70,000 cash to contribute to RRSP. 

If they can temporarily borrow $30,000 (the amount of tax withheld), they could contribute the full $100,000 to RRSP to offset the tax. They should then get a $30,000 tax refund.

A simpler option to avoid get better investment options & returns with lower fees and not tax issues could be to roll them into an IRA. This is a tax-free transfer and there is no penalty since they are over age 59 ½. This may be the best option.

Fees for cross-border tax advisors vary based on time & complexity, however a basic plan with some retirement planning, RRSP or IRA transfers and dual residency advice is typically closer to $5,000, not $15,000. A quote of $15,000 may be for a complex or high-net worth situation.

Question:

Rita and Darcy also have $650,000 in term life insurance plans ($500,000 for Darcy; $150,000 for Rita), two $100,000 whole life insurance plans and Darcy also has $350,000 of life insurance through his employer but it will stop when he retires. “Are we over-insured?” asked Rita. The premiums cost about $600 a month.

Answer:

When the first one of them passes away, the survivor will lose about half the Social Security, 40% of the QPP and all the OAS for that person. Social Security allows the survivor to continue whichever amount is higher. OAS is likely very small for them. The Social Security and QPP loss would be about $38,000/year of income. To provide this for 30 years, they would need about $650,000 of life insurance on each of them that continues into retirement.

Darcy is close enough, but Rita should ideally have more.

The high premiums are likely from the whole life insurance. They should be able to save quite a bit by cashing them in and replacing them with a term-to-100 policy for Rita or a joint first to die term-to-100 policy to replace the whole life and Darcy’s life insurance.

Question:

Rita and Darcy would also like to know if they should consider cashing in some of their stocks, the cash value of their life insurance or maybe even some of the 403(b) assets to pay off the mortgage. From a peace of mind standpoint, they feel it would be nice to put the mortgage payments towards new savings or simply reduce their cost of living. 

Answer:

Their current mortgage interest rate is low at only 3.75%. Their payment will take about 16 years to pay it off. However, their investments should all get higher returns over time than the mortgage interest rate, especially if they transfer their 402(b) retirement plans for educators to IRAs. They would have to pay tax on withdrawals, other than the small amounts they have in non-registered stocks and TFSA). They would have to cash in about $330,000 in one of the investments to pay off their $230,000 mortgage.

Their best option is to keep the mortgage and just take the lowest possible payments on it. Their security comes from having a large amount of investments growing at faster rates of return.

Ed