The Next Evolution in Retirement Spending – What Stefan Sharkansky’s “Only Other Spending Rule” Means for Cross-Border Retirees

November 14, 2025 By Cardinal Point Wealth

For decades, the “4% Rule” has been a convenient rule of thumb: withdraw 4% of your portfolio annually, adjusted for inflation, and you’re unlikely to run out of money in a 30-year retirement.

But for globally mobile clients—particularly Canadians and Americans living across the border—life rarely follows the neat assumptions embedded in that formula. Currency fluctuations, tax treaty differences, inflation divergence between countries, and non-aligned retirement systems (RRSPs, IRAs, 401(k)s, CPP, OAS, Social Security) make a simple static withdrawal rule inadequate.

A new framework proposed by Stefan Sharkansky in the Financial Analysts Journal (September 2025) offers a more elegant and actionable alternative. His paper, “The Only Other Spending Rule Article You Will Ever Need,” builds on the Annually Recalculated Virtual Annuity (ARVA) model first introduced by Barton Waring and Laurence Siegel in 2015.

In short, Sharkansky’s work replaces the idea of a fixed withdrawal percentage with a mathematically precise amortization of your portfolio—designed to provide lifetime income, adjust automatically to market realities, and remove the possibility of depleting your capital too soon.

At Cardinal Point, we see this as a powerful concept for cross-border families seeking sustainable retirement income strategies that respect both countries’ tax systems and inflation environments.

The Core Idea: Two Assets, One Adaptive Framework

Sharkansky’s strategy is intentionally simple:

A ladder of inflation-indexed government bonds—in the U.S., Treasury Inflation-Protected Securities (TIPS); in Canada, Real Return Bonds (RRBs)—held to maturity to provide a guaranteed, inflation-adjusted income floor.
A broad-market equity index fund to supply long-term growth and discretionary income potential.

Together, these two components form a self-contained “engine” for lifetime income. The retiree spends the real-income stream from the bond ladder and withdraws from the equity side using an amortization formula that automatically recalibrates each year based on the remaining horizon, discount rate, and market value.

Unlike fixed-rate rules, the portfolio can never mathematically run out of money within the chosen time horizon. And unlike commercial annuities, it preserves flexibility, liquidity, and estate value.

Why It Matters for Cross-Border Households

Cross-border retirees face a unique convergence of challenges:

Currency exposure. Canadians retiring in Florida or Americans moving to British Columbia may have expenses and pensions denominated in different currencies.
Tax asymmetry. Canadian and U.S. tax rules differ in how they treat RRSP/RRIF income, IRAs, Roth IRAs, 401(k)s, and non-registered accounts.
Inflation divergence. Canada’s CPI and U.S. CPI-U rarely move in lockstep; protecting real purchasing power requires flexibility.
Longevity and healthcare variability. Different health systems, insurance costs, and life expectancies complicate long-term projections.

A withdrawal rule that is both adaptive and transparent—such as ARVA—helps reconcile these moving parts by explicitly linking each year’s income to prevailing market returns and current life expectancy, not to rigid assumptions set decades earlier.

From Fixed Rules to Dynamic Amortization

Traditional withdrawal frameworks—like the 4% rule or “guardrails” used by advisors (e.g., Guyton-Klinger 2006)—revolve around a static withdrawal rate adjusted only after major market shifts. Sharkansky argues that these rules either:

Undershoot, leading clients to live below their means and leave unintended estates; or
Overshoot, risking depletion if returns disappoint early in retirement.

By contrast, ARVA applies the same mathematics used in annuity pricing or mortgage amortization, but recalculated annually. Each year’s withdrawal equals a share of the current portfolio designed to deplete the equity side precisely at the end of the planning horizon (say, 30 years), given the assumed long-term real return—6.9% in Sharkansky’s 150-year U.S. data set.

This means retirees spend more when markets are strong and less when markets weaken, but the plan never runs dry. Over time, the retiree extracts more total income, with variability that is transparent and controllable.

Key Findings from the Research

Sharkansky’s 150-year simulation (1871–2023) compared numerous strategies:

Strategy	Median Lifetime Real Income	Risk of Running Out	Legacy Bias
4% Rule	Lower	Low	Large surplus
Guyton-Klinger “Guardrails”	Moderate	Low	High legacy
ARVA (100% Equities + TIPS Ladder)	Highest	None (mathematically)	Customizable

Highlights:

A 100% equity allocation, amortized at 6.9% real return, historically produced higher and more consistent median withdrawals than 60/40 or 80/20 mixes—without worse downside results.
Replacing conventional bond funds with a TIPS or RRB ladder stabilized income more effectively than any mixed bond allocation.
The ARVA method guaranteed non-depletion, whereas guardrail systems could fail under prolonged poor returns.
Income variability exists but can be managed by sizing the inflation-linked bond ladder to cover essential expenses.

Translating the Framework Across the Border

For a Canada–U.S. retiree, implementing Sharkansky’s approach requires adapting it to different inflation indexes, interest-rate curves, and tax rules:

1. Building the Inflation-Protected “Floor”

In the United States: construct a ladder of TIPS maturing each year for 20–30 years, matching essential after-tax spending needs.
In Canada: use Real Return Bonds (RRBs) where available or consider short-duration nominal bonds plus inflation swaps as proxies.
Tax note: TIPS and RRBs accrue taxable inflation adjustments annually. In registered accounts (IRA, RRSP, RRIF), these taxes are deferred; in taxable accounts, after-tax yield should be used when calculating the income floor.
Currency coordination: A U.S.-resident Canadian retiree might hold a portion of the ladder in USD TIPS to match U.S. expenses, and another portion in CAD RRBs or short-term GICs for Canadian expenses.

2. The Growth Portfolio

Equity exposure: low-cost global or U.S. total-market index ETFs (e.g., VTI or VT) in USD accounts; Canadian residents can mirror exposure through cross-listed ETFs or U.S. dollar RRSPs.
Tax efficiency: Canada–U.S. treaty provisions exempt U.S. withholding tax on dividends paid to RRSPs but not to taxable accounts. Conversely, U.S. residents must report Canadian ETF income as foreign.
Rebalancing: no rebalancing needed between the stock portfolio and bond ladder; each side serves distinct objectives.

3. Managing the Planning Horizon

For most clients, the ladder covers 25–30 years of essential expenses. Longevity risk beyond that can be addressed by:

Extending the ladder gradually by reserving equity proceeds to buy new long-dated TIPS or RRBs each year.
Maintaining part of the portfolio in equities earmarked for very-late-life healthcare or estate purposes.
In some cases, layering a small, deferred life annuity beginning at age 85–90 can hedge the tail risk efficiently.

Advantages Over Traditional Decumulation Models

Transparency and Control
Clients can calculate their next-year withdrawal with a spreadsheet—no opaque Monte Carlo probabilities or subjective “success rates.” The math ensures the account balance aligns with remaining life expectancy.

Tax Coordination
Because the framework specifies which assets fund which years, Cardinal Point advisors can match income sources to optimal tax jurisdictions:

Draw U.S. IRAs or 401(k)s up to the top of a marginal bracket while converting RRSPs to RRIFs.
Realize capital gains strategically in the country of residence.
Sequence withdrawals to manage foreign-tax credits and OAS clawback.

Inflation and Currency Protection
TIPS or RRBs provide real purchasing-power stability. For clients spending in both currencies, the ladder can be split by geography—locking in real income in CAD for Canadian expenses and USD for U.S. ones.

Behavioral Comfort
Clients know their “base income” is covered by the inflation-protected floor. The equity side becomes a variable bonus rather than a source of anxiety when markets fluctuate.

Example: A Cross-Border Couple

Facts:

Dual citizens, age 67 and 65, living in Florida
$3 million USD combined retirement assets (60% USD IRAs, 40% CAD RRSPs/RRIFs).
Annual spending goal: $150,000 USD (80% U.S. expenses, 20% Canadian).

Implementation:

$1.2 million USD TIPS ladder (30 years) generating ~$54,000 real USD per year for essential expenses.
$1.8 million global equity ETF portfolio amortized over 30 years at 6.9% real rate → first-year withdrawal ≈ 7.5% = $135,000 USD.
Withdrawals recalculated annually; equities drawn from U.S. IRAs and Canadian RRIFs proportionately, considering currency needs and marginal brackets.

Outcome:

Total expected real income: ~$180,000 USD initially (above target).
No probability of depletion within 30 years, assuming the 6.9% real rate on the ETF portfolio.
Income will vary modestly with equity returns but maintain inflation protection on essentials.
Surplus equity growth can extend the ladder or fund legacy gifts.

This approach bridges both currencies, aligns taxation under the treaty, and allows spending flexibility without annuitizing capital or taking uncompensated risk.

Managing Longevity and Behavioral Risks

Sharkansky notes that no withdrawal rule can simultaneously guarantee lifetime sustainability, a flat income, and a fixed bequest. Something must give. The ARVA framework makes those trade-offs explicit.

For clients concerned about living past 95:

Extend the amortization horizon each year based on updated survival probabilities.
Reinvest unneeded income into new TIPS maturities (“rolling ladder”).
Integrate longevity insurance or permanent life insurance in Canada to cover final-expense and estate liquidity needs.

For those who prefer income stability:

Increase the proportion of the portfolio in TIPS or RRBs until essential lifestyle costs are guaranteed at 90–95% confidence.
Treat the equity withdrawals as discretionary “bonuses,” similar to variable pension distributions.

At Cardinal Point, we often express this concept to clients as follows:

“Let’s secure your floor income for life in both currencies—then let markets determine your lifestyle bonuses each year.”

Tax-Smart Execution in a Cross-Border Framework

A theoretical spending rule becomes powerful only when executed through coordinated cross-border tax planning. Considerations include:

Asset location: Hold TIPS or RRBs in tax-deferred accounts to avoid annual taxation on inflation adjustments; place equity ETFs in taxable or Roth accounts for capital-gains treatment.
Currency translation: Apply forward-looking FX assumptions; avoid unnecessary conversions that trigger gains.
Pension sequencing: Integrate CPP, OAS, and U.S. Social Security timing with ARVA withdrawals to balance taxable income.
Estate implications: TIPS and equities held in U.S. accounts may create U.S.-situs exposure for Canadian residents; use joint ownership or trusts to mitigate estate tax risk.

Our cross-border structure allows Cardinal Point to model these variables in both tax systems simultaneously—optimizing for after-tax, after-inflation, and after-currency income.

The Behavioral Side: Redefining “Success” in Retirement
Most retirement projections express outcomes in terms of a “probability of success.” Sharkansky argues this language is misleading: a 95% success rate still means living too frugally 95% of the time.

Under the ARVA lens, “success” becomes maintaining desired purchasing power while flexibly adapting to markets. Retirees should measure satisfaction not by the size of their bequest but by the consistency of their lifestyle.

At Cardinal Point, we often pair ARVA-style spending projections with our cross-border cash-flow planning tools, allowing clients to visualize a range of income paths under both currencies and tax systems.

A Smarter Spending Rule for a Cross-Border World
Stefan Sharkansky’s research revives a simple truth: you don’t need complex Monte Carlo models to retire securely. You need a disciplined, inflation-protected income floor and a transparent method for drawing from growth assets.

For Canadian-American families managing assets on both sides of the border, the ARVA framework can form the mathematical core of a truly integrated decumulation plan—one that:

Maximizes after-tax, after-inflation lifetime income;
Eliminates the fear of running out of money; and
Provides a flexible bridge between currencies, jurisdictions, and generations.

At Cardinal Point Wealth Management, we specialize in designing these integrated cross-border retirement systems—linking TIPS and Real Return Bond ladders, portfolio amortization, and dual-country tax optimization into a single coordinated plan.

For a customized cross-border retirement income plan using ARVA and inflation-linked strategies, contact Cardinal Point Wealth Management’s dual-licensed advisory team.

Moving from Canada to the U.S.: What to do with your Canadian dollar investments

March 11, 2024 By Cardinal Point Wealth

The strong U.S. dollar has created new challenges for those moving to the United States from Canada. But understanding these challenges and your options can help you more smoothly navigate the financial transition.

Here’s the background. The Canadian dollar has been valued within the same limited range for nearly a decade, and is currently valued between 0.70 and 0.80 against the U.S. dollar. That is big departure from the summer of 2014, when the ratio was 0.90 to 0.95.

In the past, when the currencies were so closely valued, many individuals planning a move to the U.S. elected to convert their bank and non-registered (taxable) investment-account funds to U.S. dollars. After all, it makes sense to hold most of your liquid net worth in your local currency. Also, converting Canadian dollars to U.S. dollars and moving Canadian taxable investment accounts to the United States simplifies tax and foreign-account reporting requirements. It also provides you with better investment opportunities, including those that are more tax efficient – while simplifying your financial and estate planning.

But a Canadian dollar below 0.80 complicates things, as most people are reluctant to convert funds at such a sizeable discount. So, let’s look at options available to individuals or families who do not want to convert their CAD taxable investment accounts to U.S. dollars.

OPTION 1 (which is never ideal): Leave your Canadian investment accounts in Canada.

If you work with a Canadian financial advisor, chances are that adviser is not registered to provide investment or financial planning advice to a U.S. resident.

A financial advisor must always be licensed in the jurisdiction in which a client lives, regardless of the client’s citizenship status or the country in which the assets reside. Thus, once you become a resident of the United States and ask your advisor to update your mailing address on file to your new U.S. address (never leave your old Canadian address on file: see this related article to learn why), one of three things will likely happen:

Your advisor will inform you that they are no longer able to provide investment advisory services to you and that you must work with someone in the U.S.
Your advisor will explain that you can keep your accounts on the Canadian platform but that they will be frozen and no further trading or rebalancing can take place.

Your advisor will explain that they are, indeed, registered in the United States and can continue to oversee all investment management services in your accounts.

To reiterate, most Canadian advisors are not registered in the United States. So, your most likely scenarios are Options 1 and 2. In the event that your advisor fits the third scenario, you want to ensure that their services and expertise extend beyond merely providing investment management.

For example, when moving to, and/or living in the United States, clients face a host of cross-border planning complexities. A true cross-border advisor will help construct an integrated Canada-U.S. cross-border financial plan that addresses tax and estate planning matters in addition to the management of your investment assets. It is critically important to align yourself with a firm that boasts a team of seasoned professionals who have earned both Canadian and U.S. credentials and designations. Those include (but aren’t limited to) Canadian CFP, U.S. CFP, Canadian CPA, U.S. CPA, and Chartered Financial Securities Analysts licensed in both Canada and the U.S.

Now, if you do decide to leave your Canadian non-registered accounts in Canada, there are number of important points to consider, such as:

Drawbacks of Canadian Funds
Canadian-traded mutual funds are considered “not registered for sale” to U.S. residents. Even more importantly, Canadian-traded mutual funds and ETFs are likely categorized as Passive Foreign Investment Companies (PFIC). The earnings and dividends distributed by such investment vehicles are subject to the highest marginal tax rates on your U.S. income tax returns. Holding these securities could also invite additional and more costly U.S. tax filing requirements. (Download our whitepaper on PFICs for further information.)

Accounting Hurdles
Canadian custodians have a reputation for doing a poor job of complying with U.S. tax reporting requirements. For example, many do not prepare and submit annual U.S. 1099 tax reports showing dividends, interest, and long-term versus short-term capital gains. But these reports are required by law if you are a U.S. resident. Furthermore, many of the tax reporting forms Canadian custodians provide to U.S. resident clients are denominated in Canadian dollars. That means that you or your accountant must convert all taxable and reportable transactions to U.S. dollars before filing your U.S. tax returns. This additional work by can increase the likelihood of errors and lead to significantly more time-consuming and expensive accounting and tax-preparation.

The Conversion Window
If converting your funds to U.S. dollars once the exchange rate improves is still your goal, make sure your investment strategy is flexible enough to accommodate a future currency conversion. For example, you do not want to be locked into investment products that must be held for a certain period of time. If they are locked when exchange rates improve, you may miss your chance to take advantage and convert because your funds aren’t accessible. Also, make sure your investment accounts are not invested in volatile or speculative securities that are subject to sharp market swings. It would be unfortunate if the exchange rates became attractive but the value of your Canadian-dollar investment holdings had deteriorated due to poor market performance or downside volatility.

Tax-Aware Investing
Make sure your advisor is managing your account under an investment mandate that reflects your U.S. tax residency. As previously mentioned, U.S. residents are subject to long-term and short-term capital gains tax rates. If you sell an asset that has been held for one year or less, any profit is considered a short-term capital gain, and is taxed at your ordinary income rate (up to 40.8%). If you sell an asset held longer than one year, any profit you make is considered a long-term capital gain, and is typically taxed at a considerably lower rate (15% or 20%). But in Canada, there is no such thing as long-term or short-term capital gains. Canada has just one capital gains rate, and Canadian portfolio managers are trained to oversee client accounts while applying that rate. Also, there are different types of investment securities, such as Canadian preferred shares, that are attractive investments from a Canadian tax standpoint but not from a U.S. tax standpoint. Tax residents of the U.S. should also seek to invest in securities that distribute qualified dividends that are taxed at a more favorable rate than ordinary dividends. For these reasons and others, it is always in your best interest to confirm that the Canadian money manager or advisor has a depth of experience working with U.S. tax residents. Be sure they know how to strategically and effectively customize the management of your portfolio to ensure total compliance with U.S. tax rules.

Reporting Requirements
You will be subject to extra foreign account reporting requirements by the Internal Revenue Service. Because these accounts are domiciled outside of the United States, the IRS will require you to report specific information about them (account number, highest market value in the tax year, etc.) on a form called the FinCEN Report 114. Additionally, you may have to file an IRS Form 8938 – Statement of Specified Foreign Financial Assets as part of your Form 1040 filing. These increased reporting requirements are time-consuming and will likely lead to substantially higher tax preparation costs.

Once you become a U.S. resident, leaving your Canadian-dollar taxable or non-registered accounts in Canada can be done under limited scenarios. But in light of the considerations above, it certainly is not ideal.

Option 2 (better, but still challenging): Move your Canadian Investment Account to the U.S.

Moving your Canadian-dollar investment accounts to the United States will simplify financial and estate-planning initiatives, and will streamline U.S. tax reporting. But you will still face challenges. For one, most U.S.-based financial advisors will automatically want you to convert your Canadian-dollar accounts to U.S.-dollar accounts − which obviously contradicts your goal of maintaining your holdings in Canadian dollars. The main reason why U.S.-based advisors make this recommendation is that their firm, or its custodian, does not offer multi-currency accounts. The U.S. dollar is the only currency option they are able to provide for your investments. It is rare for U.S. investment firms to offer Canadian dollar-denominated accounts because there is little demand for them in the United States.

Another critical consideration is that investment advisors who do offer multi-currency accounts may not know the Canadian investment market well enough to construct a proper investment portfolio. It is one thing to be able to open a Canadian-dollar-denominated account on behalf of a client (which as mentioned above, is rare). But it is quite a different matter for a financial advisor or portfolio manager to have the knowledge base, experienced acumen, and extensive training needed to build and oversee Canadian-based investment portfolios that include Canadian-traded securities.

All too often, clients are left holding their Canadian-dollar investment accounts in cash, simply because they cannot find a qualified financial professional based in the United States to expertly invest those assets.

OPTION 3 (the best option): Manage your cross-border investments with Cardinal Point.

The Cardinal Point difference is simple yet profound. We are legally registered to provide investment management and financial planning services in both Canada and the United States, without any restrictions or limitations. For clients who have investment accounts in both countries (RRSPs, IRAs, 401ks, Trusts, Non-Registered accounts, etc.), we construct integrated cross-border portfolios customized to each investor’s personal risk tolerance, needs, and goals.

Whether you are an individual living in the U.S. or are moving there with Canadian dollar investment accounts − or you have recently received a large sum of Canadian dollars from the sale of a home, business, or through inheritance, our fully certified Canada-U.S. portfolio management team can provide experienced and insightful help. We have the ability to invest your Canadian dollar accounts on a U.S. custodial platform and then tax-manage them based on your U.S. tax jurisdiction residency. As a U.S. resident partnering with Cardinal Point to oversee the management of your Canadian-dollar investment accounts, you gain significant benefits including:

Fully compliant and customized U.S. tax reporting on Canadian-dollar investment assets
Multi-currency investment accounts supported by a savvy investment team providing a variety of Canadian-dollar and U.S. dollar asset management services
Flexible and convenient foreign exchange services
Cardinal Point’s in-depth understanding of effective U.S. tax management strategies for Canadian-dollar investment accounts
Additional cross-border financial, tax, and estate planning expertise for the sustained preservation and growth of your wealth

Please contact Cardinal Point to discuss your cross-border investment management, tax, retirement, and other financial planning needs.

Should I Buy Stocks at All-Time Highs?

February 29, 2024 By Cardinal Point Wealth

That’s a question we frequently hear from investors, and it’s easy to see the rationale behind the concern. After all, we are taught to always buy low and sell high. When markets hit a new all-time high it means that they have been rising recently and we may expect prices to eventually come back down to more affordable levels. Yet much of this inclination to hold out for lower prices is based on the idea that once stocks rise significantly, they’ll begin to revert back to their previous lower levels. But in fact, stocks have historically gone up more often than down − and the markets hit new highs rather frequently.

Take a look at this chart from Ben Carlson at Ritholtz Wealth Management. It illustrates that while market returns are cyclical − with some decades achieving very few new highs − on average we tend to see hundreds of record highs each decade. We are certainly already headed in that direction in the current decade. On average, markets break through to a new high every 19 days, although the highs and lows are often clumped closely together.

S&P 500 New All Time Highs by Decade

S&P 500 New All Time Highs by Decade Using Bespoke Data we can look back at the S&P 500’s individual trading days since 1952, and see that the market has traded within 5% of its all-time high over 44% of the time. In other words, for almost half the market’s trading days the index was at (or very close to) its all-time highs. So that is a normal pattern, not an anomaly.

With stocks rising over time, the odds have favored investing sooner rather than later – although that often means investing when the market is at or near new record highs. That makes perfect sense when viewing historical charts like the one below that allow us to clearly see the length of bull markets compared to bear markets.

U.S. Equities are Upward Trending

U.S. Equities are Upward Trending But that raises a compelling question. New highs may be common, are investors really well-served when buying into the market at such lofty price points? The answer and the numbers may surprise you. The chart below from Creative Planning CEO Peter Mallouk compared 1, 3 and 5-year return when investing on any given day, versus when markets were at all-time highs.

Average Cumulative S&P 500 Total Returns

January 1, 1988 – Present

average Cumulative S&P 500 Total Returns
As the chart illustrates, average investors saw positive returns over 1, 3 and 5-year periods in both scenarios. But the average gain when buying at an all-time high was actually greater, compared to investments made during all other periods. That may seem counterintuitive, but it comes back to the idea that markets tend to rise more often than they fall. Therefore, markets that are growing tend to continue to grow for some time before experiencing a pullback. Mallouk addressed this phenomenon, explaining that “A lot of people think the market goes up and down, and so you know, if it’s an all-time high, well, it’s going down. And that’s not really how the market works. The market generally goes up. It just happens to have down periods.”

You may think, “Okay, sure, that’s fine for the average timeframe, but what about during U.S. election years like 2024? Research from Morningstar reveals that from 1937 to 2022 the S&P 500 recorded average annual returns in election years of 9.9%. That was only slightly below the 12.5% of non-election years, but still clearly positive. They also examined additional factors such as performance during periods of divided government or when the incumbent U. S. president was a Democrat – the same scenario we have today. In those years, the average return was a whopping 15.9%. In addition, since 1952 the S&P 500 has never had a down year during a U.S. presidential reelection year.

All this sounds pretty great for the likelihood of a positive return: stocks tend to go up, that tendency persists even when markets are at all-time highs, and the U.S. is in a presidential election year. But does the data guarantee equity investors a positive return in 2024? Of course it doesn’t. Nobody knows if this year will look like those previous historical examples. But if the past is any guide − and history does tend to repeat itself – neither all-time highs nor politics should dissuade you from continuing to invest toward your long-term goals. The chart below from Money Visuals is helpful for viewing those lower prices of yesterday as obvious missed opportunities − despite knowing that there is always risk due to not knowing exactly what the future holds. Nevertheless, investors who maintain a long-term perspective may want to take advantage of the record-high gains that markets experience over time – and that we are experiencing right now.

How We View the Past vs The Future

Sources: Morningstar Direct 2024, Presidential election years like 2024 as usually winners for US stocks, Matt Sommer, Morningstar, Dec 16, 2023, When Will We See New Highs Again in the Stock Market?, A Wealth of Common Sense, Nov 19, 2022

Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Emerging markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution.

Cross-Border Wealth Management: Overcoming the Downside of Over-Funding Your Child’s 529 Plan

November 22, 2023 By Cardinal Point Wealth

Are you concerned about over-funding your child’s 529 plan?

There are many potential scenarios that raise important questions. One of the most compelling is, “What if you over-contribute to a 529 plan?”

The good news is that there is new legislation that can help to alleviate concerns about that, and help you preserve more tax-free wealth. That’s the focus of this insightful blog.

Options for 529 Plan Residuals

Although funds in a 529 plan utilized for qualified expenses are withdrawn tax-free, non-qualified expenses do not offer that same luxury. This situation occurs when a child completes their higher education, but funds remain in the 529 plan. In this scenario there have traditionally been two main options:

Change the beneficiary of the 529 plan to an eligible relative – a spouse, in-laws, children, siblings, nieces/nephews, aunts/uncles, or first cousins. .
Remove the remaining assets in the 529 plan and pay ordinary income tax plus a 10% penalty on the earnings within the account – taxable to the beneficiary of the 529 plan.

New laws going into effect in 2024 provide a third option:

Unused funds within a 529 plan can now be rolled over to a Roth IRA in the name of the beneficiary, if certain criteria are met.

The New Legislation

In December of 2022, the SECURE Act 2.0 was signed into law, allowing U.S. taxpayers additional methods of enhancing their retirement planning endeavors. One option in the SECURE Act 2.0, effective in 2024, provides the latitude to transfer unused 529 funds directly into the beneficiary’s Roth IRA, tax-free.

Eligibility & Boundaries

To do so, specific criteria must be met, and the most common are:

Funds must be moved from the 529 to a Roth IRA for the 529 beneficiary, not the parent or account holder.
The 529 beneficiary must have available Roth IRA contribution room – the limit is $6,500 (2023) for a beneficiary younger than 50 years of age. For example, if $26,000 remained in the 529 account, it would take 4 years (at current contribution limits of $6,500) to transfer all of those remaining 529 funds.
There is also a lifetime maximum transfer of $35,000 from a 529 plan account to a Roth IRA.
Roth IRA income limits will not apply. However, the 529 beneficiary can only contribute as much as their earned income, or the maximum annual Roth IRA contributory maximum, whichever amount is less.
The 529 plan must have been created and maintained for a minimum of 15 years in order to be eligible for the transfer.

Benefits

Whether the child remains in the U.S., relocates to Canada, or lives a cross-border lifestyle, there are many benefits in leveraging this new legislation.

Assuming that certain basic requirements are met, Roth IRAs are highly advantageous, given their tax-free growth and tax-free distribution status. When your child is able to maximize their Roth IRA contributions right after graduation, that essentially turbocharges their retirement planning.
It allows the 529 beneficiary to avoid income taxes and the 10% penalty on otherwise non-qualified 529 distributions.
Per the Canada/U.S. Tax Treaty, the tax-free status of the Roth IRA is recognized not only in the U.S. but also in Canada – as long as certain elections are made on the Canadian entry return and no Roth IRA contributions are made after establishing Canadian tax residency. With higher tax rates in Canada, the Roth IRA can be a powerful tax management tool.

- Note that if the 529 beneficiary is a Canadian tax resident, this new opportunity to transfer unused 529 funds directly into the beneficiary’s Roth IRA should not be undertaken. Tread carefully, and speak to a cross-border financial advisor.

From the account owner’s (parent, grandparent, etc.) perspective, there is leeway when estimating how much will be needed to fund tuition. They are reassured that even if they budget more than necessary, they now have a way to avoid taxes and penalties on their 529 earnings.

Tax Implications

There are still some unknowns to be aware of, since the SECURE Act 2.0 is still relatively new and changes to the 529 plan have not yet been enacted. For example, many states allow for a tax deduction (within limits) of 529 contributions on the state tax return. But the IRS does not allow a federal tax deduction on contributions. (See further details in our publication Cross-Border Implications of Holding a 529 Plan.) At this time, we also don’t know whether or not states will follow the IRS and allow for tax-free transfer of 529 residuals into the beneficiary’s Roth IRA. Given this uncertainty, it may be unclear how custodians of 529 plans will report the transfer. In a typical non-qualified withdrawal scenario, the 1099-Q reports the total distribution in Box 1, earnings in Box 2, and original contributions (basis) in Box 3. But if the state rules don’t align with the Federal laws, that may result in tax reporting issues or complications.

Conclusion

This new tax law legislation, as it relates to 529 plans, is welcomed and helps to alleviate concerns related to the “what-if” question introduced at the beginning of this article. The legislation further enhances the tax-efficient accumulation of wealth for those young adults starting their careers at a time in life when their cash flow is likely tight. From a cross-border perspective, Canadian taxes are higher than in the U.S., so the strategic use of a 529 transfer into a Roth IRA provides an additional benefit. As a Canadian or a U.S. resident, 529 plans are a great tax-efficient tool to accumulate funds for higher education.

The contents of this article are high-level in nature and your individual circumstances will vary. Feel free to speak with Cardinal Point, a cross-border investment and wealth advisor, regarding your unique scenario. Also bear in mind that within the cross-border wealth management sphere, strategies for college funding via a Section 529 plan are in constant flux. A breakdown surrounding the mechanics and logistics of a 529 Plan can be found in our e-book: Cross-Border Implications of Holding a 529 Plan.

Cross Border Wealth Management: Navigating your RESP

September 11, 2023 By Cardinal Point Wealth

College funding for children is constantly on parents’ minds, as the cost of tuition continues to skyrocket with no end in sight. That has heightened parents’ and grandparents’ desire to maximize college savings, by utilizing financial tools such as the Registered Education Savings Plan (RESP) in Canada. But what happens if circumstances change and the family relocates to the U.S.? Or what if your son or daughter attends a university in the U.S.? How might your current RESP planning be impacted, and what strategies should you implement to overcome potential hurdles? This article speaks to these concerns while providing insightful examples to help you navigate the complexities of college savings in a cross-border context.

Summary and Takeaways

Many parents and grandparents take advantage of the Registered Education Savings Plan (RESP) in Canada, to help fund the education of children and grandchildren. But these days it is increasingly common for either the Canadian student to attend a university in the U.S. or for their family to move across the border. That can further complicate the ways that an RESP is utilized, but this article provides information to help manage those complexities to gain the most benefit from an RESP.

Key Takeaways

There are certain tax considerations regarding withdrawals from RESPs, as well as corresponding solutions to help minimize taxes and maximize savings.
Those are based on variables such as the beneficiary’s tax status, whether their siblings will attend college, and usage of Accumulated Income Payments to fund the RESP.
In cross-border situations, the United States may require U.S. taxpayers to report income from the RESP and pay taxes on it. But there are ways to help avoid such scenarios.
Cross-border financial and tax planning is always challenging, and the circumstances impacting the RESP may change – requiring adjustments and updates to your plans.
That’s why it is advantageous to consult an experienced cross-border financial professional to help navigate the nuances of saving for college tuition, within a cross-border context.

Case Study Scenario #1: The RESP subscriber remains in Canada and the beneficiary attends a Canadian post-secondary education institution.

This is the simplest circumstance to dissect, since the RESP was designed for this specific scenario. As contributions, government grants, and earnings within the RESP accrue, buckets of income are formed. There are various withdrawal strategies available, based upon the beneficiary’s tax status, the number of remaining siblings who will attend college, and the subscriber’s utilization of accumulated income payments (AIP) to fund their RRSP (up to certain thresholds). For more information surrounding the basic mechanics of the RESP please read Cardinal Point’s article: Cross-Border Transition Planning – RESPs.

As post-secondary educational costs are realized, the taxation of RESP withdrawals is as follows:

Original contributions (used for Post-Secondary Education or PSE) are non-taxable
Grants and investment earnings (Education Assistance Payment or EAP) are taxable to the beneficiary and subject to certain withdrawal restrictions

Depending on the beneficiary’s part-time employment opportunities, it’s possible that they may owe taxes on some portion of the EAP bucket.

Case Study Scenario #2: The RESP subscriber is a U.S. resident and the beneficiary attends college in Canada.

In this scenario, the RESP is susceptible to annual taxation in the U.S., reported on the subscriber’s U.S. tax return and disclosure as an “other” foreign financial asset. This is due to the U.S. view of the RESP, which sees it as a standard taxable brokerage account. The subscriber needs to report any realized capital gains and/or dividends and interest income on their U.S. tax return. For this reason, some families transfer RESP subscribership duties to a close friend or family member who is a Canadian resident and not a U.S. taxpayer. There are pros and cons to this strategy, but it does alleviate the U.S. tax reporting issues for the U.S. subscriber.

Assuming the beneficiary attends a higher education institution in Canada, the same income taxation results detailed in Case Study #1 apply. But there is one exception. There would be no benefit gained by the student transferring a portion of their education credit to the U.S. parent (unless the U.S. parent had Canadian-sourced income and was required to file a Canadian tax return themselves). All RESP withdrawals are taxable to the beneficiary who then includes the T4A EAP distributions on their T1 as a Canadian resident. Keep in mind that each Canadian resident has access to annual basic personal amounts (BPA). This is a non-refundable tax credit that can be claimed by all individuals to provide a full reduction from federal income tax to all individuals on their taxable income up to the BPA. This is an important detail for Canadian resident students to note when withdrawing EAP while attending colleges and universities in Canada.

Case Study Scenario #3: Both the subscriber and beneficiary are U.S. residents, and the beneficiary plans to get their post-secondary education at a U.S. institution.

In both the second and third scenarios, it would have been necessary to open the RESP while both the subscriber and beneficiary were Canadian residents. Now let’s assume that the subscriber has not shifted their RESP duties to a Canadian resident and continues to report the annual RESP income on their U.S. tax return. All income, inclusive of capital gains within the RESP, needs to be converted to USD and reported and taxed in the U.S., which can lead to increased tax liability and tax preparation costs. Furthermore, if the aggregate total of the maximum market value of all foreign (non-U.S.) financial accounts is greater than $10K USD (a very low bar), an FBAR/FinCEN 114 disclosure report needs to be electronically filed. The taxpayer may also need to include a Form 8938 (higher thresholds) with their U.S. tax return. It’s debatable whether the RESP is considered a foreign trust, but recent IRS Revenue Procedure 2020-17 suggests that Forms 3520/3520-A are no longer required for RESPs.

From the beneficiary’s perspective, any income withdrawn from the RESP needs to be allocated to a specific bucket (PSE vs EAP). In the case of PSE, this is seen as a non-taxable return of capital to the subscriber. These payments represent after-tax contributions to the RESP. If withdrawals include EAP, then as a non-resident of Canada grants need to be repaid to the Canadian government and any earnings necessitate a 25% non-resident withholding tax payable to CRA on behalf of the beneficiary. But the beneficiary does not need to report the EAP on a U.S. tax return, since the account is only taxable to the subscriber.

Conclusion

Tax-related information is a powerful and essential tool to help you strategically plan optimal methods of navigating Canadian assets such as the RESP, RRSP, LIRA, and TFSA. As cross-border financial planners we are in a unique position to examine the intricacies of complex cross-border wealth management scenarios, including those regarding your RESP within Canada or the U.S. Although we only explored three commonly experienced scenarios, there are many other possibilities. To unpack your specific circumstances and learn applicable solutions and strategies, please contact Cardinal Point.