TFSA vs. Roth IRA Canada's Tax-Free Savings Acc

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TFSA vs. Roth IRA

Canada's Tax-Free Savings Account (TFSA) is fairly similar to Roth IRAs found in the U.S. Both of these retirement-focused vehicles are commonly known as tax-exempt accounts, meaning that they are funded with after-tax money and provide growth tax free, even when funds are withdrawn. TFSAs allow for long-term retirement planning, as Canadian residents over the age of 18 can contribute $5,000 annually to this account. On the other hand, almost anyone can contribute to a Roth IRA regardless of age, but, more importantly, maximum contributions are also $5,000, and $6,000 for those over the age of 50. Another similarity between these accounts, which differentiates them from tax-deferred plans, is that there is no limit on when one must stop contributions and begin withdrawing money.

TFSAs offer two significant advantages over the American alternative. Young Canadians saving for retirement are able to carry over their contributions to future years, while such an option is not available with Roth IRAs. For example, if a tax payer is 35 years old and is unable to contribute $5,000 into their account, due to an unforeseen outlay, next year the total allowable amount accumulates to $10,000. Secondly, distributions out of Roth IRAs must be classified as "qualified" in order to qualify for the preferential tax treatment. Qualified distributions are those made after the account has been open for five years, and the taxpayer is either disabled or is over 59.5 years of age. Canada's plan does offer more flexibility in terms of providing benefit for those planning for retirement.

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Source: http://www.investopedia.com/articles/retireme...merica.asp

Note : This article was written about 2 years ago, and the annual Roth contribution limits are now higher than stated in the article, and the TSFA limits may be higher as well. However, the rest of the comparison is still valid.