Canadian TFSA Vs American Roth Ira

by Mike Holman

This is part three of my three part series comparing various Canadian and American investment accounts.

I had a request recently from a blogger friend of mine – Paid Twice, who thought it would be a good idea to do a post on some of the more common U.S. and Canadian investment accounts. This post deals with the Canadian TFSA and the American Roth IRA. In part one I looked at retirement accounts – the Canadian RRSP and the American 401(k) . Part 2 compared educational savings plans – the Canadian RESP vs American 529 plan.

Please note that this is just a general comparison – it’s not intended to be reference material for any of the accounts listed.

A big thanks to Madison from My Dollar Plan for helping out with this series.

canada_flag.gif mini-americanflag.gif

Canadian savings account

TFSA – Tax-Free Savings Account

American equivalent

Roth IRA

Similarities

  • All contributions to these accounts are after-tax money. No tax benefit is generated from the contribution – however a contribution to the Roth IRA can qualify for the retirement savings credit.
  • All earnings of any type within the TFSA and Roth IRA are not taxed.
  • Most common security types (stocks, mutual funds etc) are allowed to be purchased in account.
  • Annual limits are similar – $5,000 for the TFSA in 2009 and $5,000 for the Roth ($6,000 if you are age 50 or older).
  • Relatively new account types. The Roth IRA was established in 1998 and the TFSA doesn’t start until January 1, 2009.

Differences

  • Withdrawals from the TFSA are not taxable. Withdrawals of contributions from a Roth IRA are not taxable but withdrawal of earnings are only not taxable if the participant is 59.5 years of age or older and the account has been opened for at least 5 years.
  • Contributions limits for the TFSA are not income dependent. Limits for the Roth IRA are phased out with higher incomes.
  • TFSA contribution room can be carried forward (accumulated) which is not the case for the Roth IRA.

Conclusion

The general idea of these accounts is quite similar in that you can contribute after-tax money and allow it to grow tax-free. The TFSA withdrawal rules are much more lenient than that of the Roth IRA but as discussed earlier in the series, this might not be such a good thing if it encourages investors to withdraw money without good reason.

Read more for a detailed look at the 2009 Roth IRA contribution limits.  That post also covers phase out and traditional IRA.

More information on the TFSA

Benefits of the Canadian tax free savings account

Tax Free Savings Account (TFSA) Basic information for Canadians

Tax Free Savings Account refresher for Canada

ING offers TFSA refresher for Canadians

Is the RRSP still worthwhile because of TFSA accounts?

Using the Tax Free Savings Account (TFSA) for Canadians as an emergency fund

More Information

Roth IRA Contribution Limits For 2010

Be Sociable, Share!