Hi all,
Canadian citizen here living in the US. I have the option to naturalize and want to get the community's opinion on if I should from a FIRE financial perspective. Please note that I don't really plan on spending any more time in the US, I want to be a US citizen for the tax benefits. My spouse is in the same situation. Most of our wealth has been generated in the US.
Margin account: 1.35M
401K: 470k
Roth IRA 150k
RRSP: 140k
These amounts are combined for the two of us. Planned WR 3% of initial portfolio. No kids and won't have them.
Next year when we FIRE, we want to move abroad and live around the world. Sometimes for 6 months, sometimes for 3 years in a place. Sometimes for just 3 weeks and we will travel often.
I understand the US tax reporting can be complicated and cumbersome, but hear me out.
When we don't have a permanent home, we will claim US tax residency and only pay capital gains + dividend tax to the US. If we didn't claim US citizenship, we'd have to pay tax to Canada. US gets 80k capital gains and dividends for a married couple tax free, and we can continue to rollover our IRA into Roth accounts. In Canada, the same tax estimate on our withdrawals would be about 4k total per year. So we'd save 4k a year by claiming US tax residency.
As well, if we do have a permanent home abroad, being an American is still advantageous. Yes, we will have to file taxes in two countries and that will be annoying. Yes we'd have trouble opening bank accounts and FBAR is a pain. And we won't get the same capital gains benefits. However, we'd be transitioning from US tax residency to foreign country tax residency, which isn't costly. In Canada, if you exit Canadian tax residency, you incur all of your capital gains in one go. They pretend you sold it and bought back at the same price. This is very penalizing, in the realm of hundreds of thousands of dollars just because we want to live 3 years in Spain (as an example). I ran an excel file that estimates my cumulative capital gains. There is exit tax potential to be 150k-200k, depending on when we do it.
The way the tax code works is that anytime we don't have a permanent home, if we were only Canadian we'd have Canadian tax status. If we were Canadian and US, I can argue we want US tax status because we have all of our financial ties to the US. We would keep all of our assets in the US forever.
Another benefit is that our 401k would be taxed more favourably on withdrawal. If you are a Canadian tax resident, you pay Canadian taxes on your 401k. If I am a US tax resident, I pay US taxes, which are much lower. Withdrawing 70k usd per year right now means 10k tax in the US and 14k in Canada.
Another benefit is that we'd continue to be able to rollover IRA into our Roth. This is only if we aren't also say, a Spanish tax resident. This is better than the Canadian version of the equivalent, which only lets me do 6k CDN per person per year. I can rollover like 12k per person per year into a Roth tax free.
The long term downside is that we will eventually retire to a non-US country with free healthcare. Particularly Canada is the most likely option. Being an American citizen while old and in Canada would be penalizing. However this is probably 30 years away, and in theory we could renounce US citizenship at that point if it was financially not working out. US citizenship renouncing is costly if your NW is worth more than 2M (as an individual). If we have a NW of 4M combined, we are probably ok and don't need to worry too much about taxes at that point.
Thoughts?
