Canada is better than you in the following ways:
3. Larger in size, which, as the ladies can tell you, means everything
4. Hotter women
5. Less fat women
6. Dill pickle potato chips
7. Nelson, B.C. (never been there but come on! It’s named after me)
8. Real maple syrup
9. Not every crazy carries a gun
10. Socialized medicine
The following things about America are better than Canada:
Now that we’ve cleared that up, I can move onto the post. AND WHAT A POST. As a fellow Canadian, you might feel a little inadequate when our neighbours (see what I did there?) to the south start talking about their retirement plans. They’re acting all high and mighty, with their 401Ks and their Roth IRA’s, and their extra large sizes of Wendy’s. Sometimes, you might not even have a clue what they’re talking about, probably because they aren’t ending every second sentence with ‘eh’, eh.
Well, fear no longer little one. For Nelly is here to decode this mystery. How exactly do these plans differ from the ones offered in the U.S.? Are their plans better in every way? Prepare to find out, by reading the best part of the stuff I pull out of my ass.
The 401k is equivalent to Canada’s RRSP, with a few distinct differences. Firstly, up here, we come up with a nice acronym to describe our retirement plans, while they just used the line of the tax code which applies. How boring. It would have taken you guys like 10 minutes longer to come up with something nice, but instead you took the easy way out. No wonder your country is a pile of crap next to the all mighty Canadian empire.
Like with the RRSP, Americans enjoy tax deferred growth inside their 401k until they start to withdraw it, and then it’s taxed as normal income. In Canada, you can withdraw from your RRSP at any time, however you will pay a withholding tax if you do. Meanwhile, if you convert your RRSP to a RRIF (registered retirement income fund) then you can withdraw without paying a withholding tax. You’ll still owe tax, it’s just up to you to pay it. You have to start withdrawing from your RRIF once you hit 71.
Meanwhile, Americans can withdraw from their 401ks anytime after they turn 59 and a half for some reason. What’s up with the half year there, Americans? Like in Canada, there’s a limit to the government letting you enjoy tax deferred growth, as you have to start withdrawing once you hit 69. (giggity)
In Canada, the 2012 contribution limit is $22,970 or 18% of your employment income, whichever is lower. In the U.S., it’s been recently upped to $17,000. In both countries, you’re allowed to make up for last year’s contribution if you missed it, but the U.S. has a $5500 limit (on certain plans), where in Canada you get to keep all that precious unused contribution room.
There are all sorts of other little details, but they’re unimportant. Which plan wins, when put up side by side?
Verdict: RRSP! Higher contribution limits and longer tax deferred holding periods FOR THE WIN.
Ever wonder where Canada stole the idea of the Tax Free Savings Account? (TFSA) Look no further, because I have the answer. Just like we took their football and made it better, we did the same with the Roth IRA.
It’s so similar to the TFSA it’s scary. Their contribution limit is $5000, our contribution limit is $5000. They don’t tax withdrawals when you hit retirement age, neither do we. They don’t give a tax credit for contributing, and neither do we. Their acronym is 3 letters, ours is 4. FINALLY A DIFFERENCE.
There are certain restrictions for withdrawing your Roth IRA funds before retirement, where in Canada we have no such restrictions. You can convert a Roth IRA to a traditional IRA (which is a lot like the 401k) and you can take your TFSA money and use it to fund your RRSP, but that would be silly, because you’d be looking for the tax break.
These plans are more alike than the Sedin twins. FINALLY, A HOCKEY JOKE HERE AT FINANCIAL UPROAR.
Verdict: Roth IRA by a nose.
Keeping up the boring name parade is the 529 plan, America’s version of the registered education savings plan (RESP). Isn’t the IRS allowed to have any fun?
Both plans allow parents to contribute money to fund little Timmy’s education, providing you don’t drop him on his head too many times. The big difference is Canada obviously wants little Timmy to go to school a little more than Obama does (bastard!) because they will give you an extra 20% of your contribution for free, up to a maximum contribution of $2500. So, they’ll top up little Timmy’s RESP by a maximum of $500 per year.
What happens if little Timmy decides college is for chumps, and runs away to join the carnival instead? In Canada, you’d have to pay back any money received from the government (boo!) but the parents get to keep the interest earned (yay!). They can also roll the whole thing into their RRSP, assuming the have the contribution room. Or, you can just give the whole thing to your kid, who’ll have to pay normal tax on the earnings, plus an additional 20% of that tax as a penalty.
(Aside. Want info on RESPs? Go check out MoneySmartsBlog. He’s all over that stuff.)
Meanwhile in the U.S., 529 plans don’t get any extra from the government, they can’t be rolled over into the parent’s 401k and they just generally kind of suck in comparison. They do generally have much higher contribution limits, probably because it’s cheaper to buy Taylor Swift and make her your love slave than go to college. If an American teenager decides against college, parents can transfer the plan to a smarter sibling, or just choose to withdraw it and only face a 10% tax penalty.
Verdict: R! E! S! P!
Now, if you’ll excuse me, there’s a cute bunny in my yard that needs to be chased. Feel free to point out all my errors in the comments.