Is a Roth IRA the Same as a TFSA?
Tiffany Woodfield, Senior Financial Advisor, Associate Portfolio Manager, CRPC®, CIM®, TEP®
Summary of Key Points
A Roth IRA and a tax-free savings account (TFSA) are not the same, though both use after-tax dollars, grow tax-free, and generally allow tax-free withdrawals.
Roth IRA eligibility requires earned income, has income limits, and does not allow unused contribution room to carry forward.
A TFSA is based on annual government limits and requires Canadian tax residency, a valid SIN, and being over age 18.
Roth IRA withdrawals before age 59½ or before five years may trigger taxes and penalties.
TFSAs allow withdrawals and recontributions without penalties, except in cases of over-contribution.
Video Script
Is a Roth IRA the same as a tax-free savings account?
No. There are some similarities in that they're both funded with after-tax dollars. They grow tax-free and when you take the money out, you're generally not taxed.
Now let's talk about some of the differences.
To be eligible to contribute to a Roth IRA, you have to have earned income and if you earn too much, you can't fund a Roth IRA. A tax-free savings account, totally different. It's not based on earned income. It's based on a set amount by the government each year, and you have to be a permanent resident over the age of 18 living in Canada.
With a Roth IRA, if you take the money out before the age 59 and a half or you haven't held the account for five years, you can face taxes and penalties.
In addition, if you don't contribute one year, that room does not carry forward to the next year. With a tax-free savings account, there are no penalties. You can take the money out and you can put the money back in.
The only situation where you might face penalties is if you over-contribute in one year.
Finally, if you have a Roth IRA and you're planning to move to Canada or already living in Canada, I suggest you schedule a call with one of our cross-border experts.