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Terry Ritchie on Unraveling Cross-Border Financial Planning

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Snap Projections, a financial planning software company, recently featured Cardinal Point’s Partner and Director of Cross Border Wealth Services, Terry Ritchie, on their Growing Your Financial Advisory Practice podcast. Given Terry’s more than 30 years of experience in cross-border financial, investment, tax, and estate planning, it’s no surprise that Snap Projections chose to tap into his insight for this primer directed at financial planners who want to serve US-Canada clients.

From the factors driving clients to move between Canada and the US (hint: politics, healthcare, family, and lifestyle all play a role) to the intricacies of visas, green cards, and US income tax, the podcast highlights Terry’s wealth of knowledge and passion for cross-border work.

Here’s everything discussed in the one-hour episode:

  • Why people move between Canada and the US.
  • Why Terry thinks cross-border work matters.
  • What you MUST know about visas and green cards.
  • Important elements of US income tax.
  • Limitations on Canadians who invest in the US.
  • Estate planning for cross-border clients.
  • The biggest cross-border planning mistake advisors make.
  • How to grow a financial planning career you really love.

Sweeping New Changes to U.S. Based Retirement Accounts in 2020

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On December 20, the Setting Every Community Up for Retirement Enhancement Act of 2019 – better known as the SECURE Act – was signed into law. This is the most extensive piece of retirement planning legislation passed in U.S. history.  And although the legislation is not as broad as the U.S. income tax changes of the Tax Cuts and Jobs Act of 2017, these new rules will apply to all who participate, contribute, own, or are beneficiaries of U.S. based retirement plans.  Further, the rules also apply to Canadian residents who own such plans or might be the ultimate beneficiaries of U.S. based retirement accounts.

The SECURE Act is comprised of 16 sections of legislation.  However, this article will focus on only those sections that will likely have the greatest impact on you.

New Required Age to Start Taking Required Minimum Distributions (RMDs)

To put things in perspective from a Canada-U.S. retirement plan context, many of our clients who hold Canadian based retirement accounts – known as Registered Retirement Savings Plans (RRSPs) – would be required to convert these plans to a Registered Retirement Income Fund (RRIF) by December 31 of the year that they turn age 71.  After that time, the Canadian government requires that a minimum distribution amount must be taken from the RRIF. This amount is based on the account holder’s age and a percentage factor applied to the value of the account as of December 31 of the previous year.

For example, if you were age 73, you would be required – at minimum – to take out 5.53% of the value of your RRIF for the tax year. The factor percentage goes up over time based on age. In 2015, the Canadian Federal Budget was changed to reduce the minimum withdrawal factors, allowing more Canadians to not have to take larger amounts from their Canadian RRIF accounts during retirement.

If you are no longer an income tax resident of Canada, it is important to note that under the Canada-U.S. income Tax Treaty, you are eligible to take the greater of 10% of the value of the December 31 amount or TWO TIMES the minimum withdrawal factor.  This will allow you to take a bit more out of your plan than the traditional Canadian tax resident and only be subject to a 15% Canadian withholding tax.

From a U.S. retirement account perspective, under previous rules, you were required to start taking minimum withdrawals – referred to as Required Minimum Distributions (RMDs) – in the year that you turn age 70.5.  Under the SECURE Act, the RMD age is now increased to 72.  If you have not yet reached age 70.5 by the end of 2019, your new RMD age is 72.  However, if you have already reached age 70.5 by the end of 2019 or are already taking RMDs from your retirement account, the SECURE Act does not change your RMD age.  So, if you are expected to turn 70.5 years old in 2020, you will not be required to withdraw your RMD until you are age 72.

Unlike the minimum withdrawal factors applied to Canadian RRIFs, RMD amounts are based on specific IRS Life Expectancy Tables.  For example, if we were to look at the IRS Uniform Lifetime Table (Table III), at age 73 your distribution period would be 24.7 years. You would divide your retirement account value by the distribution period to determine your RMD amount. The distribution period factor declines as your age increases.  However, by pushing back the RMD start date, the SECURE Act provides another year and a half of continued tax deferral.

Removal of Age 70.5 IRA Contribution Limitations

Under previous rules, if you continued to work past age 70.5, you could no longer contribute to a traditional IRA.  Starting at the beginning of this tax year, that restriction has been removed.    This means that if you are planning to work/consult past age 70.5, you can still contribute to either a deductible or non-deductible IRA. This further depends on your income, filing status, and participation in another qualified employer-based plan. However, it allows for a $7,000 deductible contribution ($14,000 as a couple) if you met certain requirements.

New Inherited “Stretch” IRA Provisions

This is probably the single largest provision that will impact U.S. retirement account beneficiaries excluding a surviving spouse.  And it’s a “yucky” turn of events.  This will also impact those beneficiaries that are not U.S. resident taxpayers and exclusively Canadian resident taxpayers.

Under previous rules, a non-spouse beneficiary of a U.S. based retirement account could “stretch” out their RMDs from the plan over their own life expectancy.  For example, with certain exceptions – including your surviving spouse – a named beneficiary of the U.S. retirement account who had a 35-year life expectancy could have deferred full receipt of the retirement account benefits over that period. However, the new rules require that the named beneficiary – except a surviving spouse or eligible beneficiary – will only have 10 years after the year of death to distribute the entire retirement account.

Note that there is no RMD within those 10 years, but the entire balance must be distributed by the end of the tenth year.  So, conceivably, you could defer any distributions until the tenth year and then take the entire retirement account value that year.  This will require beneficiaries – other than surviving spouses or eligible beneficiaries – to be far more proactive when it comes to their Canadian and U.S. income tax planning as they will have to manage the income tax result caused by the distributions over the shorter period along with their other income tax and financial planning initiatives.

Who is an Eligible Beneficiary Under the New Act?

These individuals include a surviving spouse, a minor child, an individual who is disabled or chronically ill, or an individual who is not more than 10 years younger than the owner of the plan. These beneficiaries can all continue to withdraw from the inherited retirement account over their life expectancies.  However, if the eligible beneficiary is a minor child at the time of the owner of the plan’s death, he or she will automatically be subject to the 10-year rule upon becoming an adult.

Like the current rules, if the beneficiaries are not named or designated – such as charities, estates, or certain trusts – the account must be withdrawn over five years if the owner’s RMDs have not already begun or over the owner’s remaining life expectancy if those distributions have begun at the time of the owner’s death.

Planning Considerations

  1. Given these new rules, revisit and be proactive with your tax and estate planning
    Given the acceleration of RMD amounts to non-eligible beneficiaries, it is important to understand the impact of the greater level of wealth that might pass to your children and the financial, tax, and estate planning implications to them.In some cases, it might make sense to leave your retirement account to a charity and consider the role of life insurance to benefit your children or the role of a Charitable Remainder Trust (in the U.S.) to maximize legacy benefits for your family.
  1. Revisit the role of ROTH Conversations
    In certain cases, this can be a great planning opportunity for those choosing to leave the U.S. and establish Canadian income tax residency in retirement. However, while ROTH IRAs are subject to RMDs when inherited, the distributions are not subject to income tax to the beneficiary. Given the now overall lower marginal tax rates in the U.S., it might make sense to convert money from your traditional retirement account to that of a ROTH IRA. Even though the 10-year rule would still exist for non-eligible beneficiaries, the distributions would not be taxable over that period.
  1. Review the beneficiaries of your U.S. based retirement accounts
    Because many inherited retirement accounts will be distributed over a shorter period, make sure that you – and in some cases, your beneficiaries – are aware of the implications.
  1. Revisit your Comprehensive Financial Plan
    If you are a likely beneficiary of a parent or family member’s U.S. retirement account, this could have significant Canada-U.S. financial, tax, and estate planning considerations.  It could change the level of inherited wealth in a much more dramatic – good, bad or ugly – way.  It is important that you work with Cardinal Point to determine the potential impact and planning opportunities that might be available to you and your family.
  1. Finally, if you are presently taking RMDs from your U.S. based retirement accounts or are already the beneficiary of an Inherited IRA or ROTH IRA account, you are grandfathered under these rules and the new provisions will not apply to you.

Terry Ritchie featured in article, “Could cross-border partnerships be the key to serving ex-pat clients?”

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In today’s increasingly mobile society, it’s not that unusual for people to give up residency in their nation of birth in order to work or retire in another country. In fact, according to the United Nations Department of Economic and Social Affairs, there were an estimated 271,642,105 ex-pats around the world in 2019. But what does this globetrotting mean for the financial professionals who advise them?

From obtaining multi-country licensing and registration to referral partnerships and carefully choosing the services they offer, some financial providers have found ways to continue serving their ex-pat clients. In this article from The Globe and Mail, several of these professionals share their strategies. Read the full story

The Politics of Investing

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We all know politics is an uncomfortable topic for many people. In fact, a recent research paper from the University of Nebraska found that politics was making Americans physically sick. According to the study, nearly 40% of Americans reported that they were stressed out by politics, while 20% said they were losing sleep over politics. In recent conversations with clients, politics is certainly on many people’s mind and is hard to avoid.

With upcoming elections this month in Canada, both the Liberals and Conservatives have proposed budgets that would in varying degrees add to annual deficits in the near term. With a decent chance neither party will win a clear majority, more compromises will probably be needed, and the outcome will not be that dramatically different from the status quo.

While the Canadian election cycle is a concise 40 days, the U.S. election cycle never seems to end. When we see pitches and policies floated in the media on a daily basis with more than a year to election time, it’s natural to wonder what impact, if any, they will have on our investments. It’s also nearly impossible to avoid articles or pundits who are absolutely certain that if candidate X wins, the market will drop by Y%. While politics may be making us physically sick, does it also impact our investing habits?

A recent academic study from Professor Kemph of The Booth School of Business at the University of Chicago and Professor Tsoutsoura of the SC Johnson Colle of Business at Cornell University (“Partisan Professionals: Evidence from Credit Rating Analysts”) showed that bond credit analysts of both parties typically let their political biases impact their corporate bond ratings. The researchers found that analysts who voted for the opposite party of the president, tended to lower their bond ratings during that presidency.

This isn’t surprising when we view investing through the many lenses used in behavioral finance, such as confirmation bias – one’s tendency to search for, interpret, favor, or recall evidence that confirms one’s already existing belief. In other words, if you disagree with one political party, you probably look for reasons for why that party gaining or staying in power would be bad for your investments.

These are highly educated professional analysts who still had trouble disentangling their political persuasions from their day-to-day job of assessing the credit ratings of entirely unrelated companies. What hope does the average investor have?

Let’s take a step back from the political squabbling of 2019 and soon-to-be 2020 and realize that the medium- to long-term returns we see on most investments are likely to be impacted far more by the direction and strength of economies and company earnings than by an election result. Even if – hypothetically – the U.S. economy were headed for a 2020 recession, it likely doesn’t matter who wins the election since they will be jumping into the captain’s seat of a massive ship to which the president can only make minor changes of speed or direction.

Think back to 2008 and 2012, when it was common to hear investors worrying that an Obama presidency would wreck the stock markets and be the end of capitalism. In 2009, The Wall Street Journal ran an op-ed warning that “Obama’s Radicalism is Killing the Dow”, virtually at the bottom of the bear market – the time you would have benefited the most from being invested. Similarly, many investors had agonized that the Trump presidency would quickly send the economy into recession or worse. On election night, as S&P 500 futures were plunging, everyone was forecasting financial disaster as soon as he stepped into office. Investors who stayed invested over the last 10 years, regardless of who was in office, have been generously rewarded.

We tend to exaggerate the impact that any politician can have on the long-term value of companies. How much impact will the next Prime Minister’s or President’s policy decisions have on the future value of all the hamburgers McDonald’s will serve worldwide over the next 50 years, or parkas sold by Canada Goose?

Election results will soon be known in Canada, and whichever Democratic nominee emerges in the U.S. will shed a bit more light on what the range of U.S. policy differences may be after the 2020 election. In any case, we’d expect there to be some moderate shifts on both sides of the border regarding issues like tax rates and estate planning. The only constant in financial planning is change. No investment plan is meant to be stagnant over decades but should always be viewed as a living document – a document that incorporates changes in the investment and tax environments as well as your own unique circumstances. An investment plan ensures that your overall asset allocation is still the appropriate mix to meet your long-term goals.

The few investment changes that Cardinal Point has made over the last year have all been with the aim of making our portfolios more robust to potential stock market declines, regardless of whether those were to occur due to election results, geopolitical surprises or a further slowdown in economic growth. While we closely monitor global financial markets, speculating on the latest tweet is not a sound way to reach your long-term investment goals.

 

Cardinal Point Wealth Management Featured in ETF.com

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Terry Ritchie, Director of Cross-Border Wealth Services, and Matt Carvalho, CIO, recently sat down with Lara Crigger at ETF.com and discussed some of the tricky aspects of moving abroad.

When your expenses are in a different currency from your income, currency hedges and dollar-cost-averaging are normal ways to deal with uncertainties in global markets.

But there are also many other financial issues to consider, such as immigration and social security:

“You can’t just cross the border and say, ‘I live here now; I’m going to work here and get free health care’. There’s a process,”, says Ritchie and points out that the job of financial planners is to take a big-picture view. For tax and financial regulatory reasons, you may have to change some of the ETFs or mutual funds held via 401(k)s – or else face some onerous tax implications and heavy paperwork.

It all has to be part of a comprehensive financial plan, catered to the specific individuals moving and their conditions.

Read more at ETF.com