TFSA vs Roth IRA - What are the differences?

Written by Tiffany Woodfield, Portfolio Manager, Financial Advisor, CIM®, CRPC®
Reading Time: 7 minutes.

Are you moving across the Canada/US border and planning for the future?

Well then you may be wondering what the different government savings plans are. As a cross-border financial advisor, one of the most common questions I get is about the difference between a TFSA vs a Roth IRA.

Since there are so many similarities, my clients who are retiring to Canada often want to know what the differences are. When you contribute to a TFSA or a Roth IRA, you don't get a tax deduction at the end of the year. But beyond that, there are plenty of distinctions.

Differences Between TFSA and Roth IRA
Similarities Between TFSA and Roth IRA
Can You Transfer Roth IRA to TFSA If You Retire to Canada?
Taxation of TFSA vs Roth IRA
Taxation of Roth IRA in Canada
Benefits of Having a TFSA
Benefits of Having a Roth IRA
Retirement in Canada vs. the US

Differences Between TFSA and Roth IRA

The main differences between a TFSA and Roth IRA are as follows:

You can carry unused contribution room for a TFSA forward. So if you do not contribute to a TFSA one year, you can use that "room" in a future year. With a Roth IRA, you cannot carry the contribution room forward.
With a TFSA, you can contribute any savings as long as you are older than age 18 and a Canadian resident. But with a Roth IRA, you can only contribute earned income.
A TFSA is not based on earned income. Therefore you can't reach an income level where you are no longer eligible to contribute. With a Roth IRA, if you earn too much, you are not eligible to contribute.*
With a TFSA, you do not gain extra contribution room as you age. But with a Roth IRA, you have an increase in contribution room of $1000 after you turn 50.
With a TFSA, you have more flexibility than with a Roth IRA. With a TFSA, you can take money out whenever you like without penalty. But with a Roth IRA, you need to have held the account for at least five years and be 59.5 or older not to be subject to tax on the earnings in the Roth IRA or to face a penalty.

*You need to have a MAGI (Modified Adjusted Gross Income) as a single person under $140,000 US for the tax year 2021 to be eligible to contribute to a Roth IRA. If you are married and filing jointly, your MAGI needs to be under $208,000 US for the tax year 2021.

Similarities Between TFSA and Roth IRA

The similarities between a TFSA and Roth IRA are as follows:

The annual contribution room for a TFSA as of 2021 is $6000 plus any contribution room you didn't use in previous years. The maximum contribution room for a Roth IRA in 2021 is $6000 or $7000 if you are age 50 or over.
Both the deposits made to a TFSA and Roth IRA are not tax-deductible. So you do not get a tax reduction in the year you contribute.
You don't pay tax on TFSA withdrawals or Roth IRA withdrawals as long as it is a qualified withdrawal.*
Both a TFSA and Roth IRA are government plans designed to encourage people to save money.
A TFSA and Roth IRA can hold investments such as mutual funds, stocks, bonds, and cash.
You will not be taxed on the gains on the investments in a TFSA. You will also not be taxed on the gains on the investments in a Roth IRA as long as you make a qualified withdrawal.*

Please note that if you were eligible to contribute to a TFSA since 2009, when the program was created, your cumulative room would be $75,500 as of January 2021.

Also, if you bring your Roth IRA to Canada, you need to file a one-time declaration. And you cannot continue to contribute.

*A qualified withdrawal is when you have held a Roth IRA account for at least five years, and you are older than age 59.5. If this is the case, you can make a withdrawal, and the earnings will not be taxed.

Can You Transfer Roth IRA to TFSA If You Retire to Canada?

You cannot transfer your Roth IRA to a TFSA if you retire to Canada. The plans are not recognized as the same by the Canadian and US governments.

However, once you are a permanent resident of Canada, you can contribute to a TFSA. But if you are considered a US person (green card holder or US citizen), a TFSA may not be the best solution. For tax purposes, the IRS doesn't treat a TFSA the same way as the Canadian government. Speak to your cross-border accountant about this before you open an account.

Also, if you want to have your Roth IRA managed while you live in Canada, you can work with a cross-border financial advisor. A financial advisor licensed in Canada and the US can help you manage your Roth IRA in Canada.

If you lived in Canada previously and want to determine how much room you may have in your TFSA, go to your MyCRA account at Contributions - Canada.ca

Taxation of TFSA vs Roth IRA

The contributions you make to a TFSA and Roth IRA are not deductible for income tax purposes.

For example, when you contribute to an RRSP or IRA, it is a deductible expense which means it reduces your reportable income and, as a result, the income taxes owed. But with a TFSA or Roth IRA, the contributions are not deductible. So you do not get a tax break when you contribute to a TFSA or a Roth IRA. You are contributing with after-tax dollars. But the good news is that the income and capital gains earned in the account from your investments are generally tax-free even when you take them out of the account.*

Here's a simple example:

Suzy has contributed $100,000 to a Roth IRA over the past 10 years. The investment has grown to $150,000. Suzy is now 60 and would like to start taking some money out. Since she is over the age of 59.5, and she has held the account for more than five years, she can take the money out and the IRS will not tax her on this "qualified distribution."

*For a Roth IRA withdrawal to be considered tax-free, it needs to be a qualified distribution which means you have held the account for at least five years, and you must be 59.5 or older.

Remember that if you have a Roth IRA in Canada, you need to file the one-time election. You must also never contribute to your Roth IRA once you are a Canadian resident.

Taxation of Roth IRA in Canada

If you're moving to Canada, you need to know how the CRA will tax your Roth IRA.

First, once you are a Canadian resident, do not contribute to your Roth IRA. Doing so will cause a tax problem. You must file a one-time treaty election by April 30th of the year after becoming a permanent resident.

If you do this, the CRA will treat the Roth IRA as a pension. If you didn't contribute once in Canada and filed the one-time election, your Roth IRA will not usually be subject to taxation in Canada.

Keep in mind that to prevent US taxation on withdrawals from your Roth IRA in the US, you still need to ensure you're only making a qualified withdrawal.

A qualified withdrawal is if you have held a Roth IRA account for at least 5 years and you are older than the age of 59.5. If so you can take a withdrawal and the earnings will not be taxed. The contributions are never taxed as you are just taking out money you put in which was after tax dollars. If you bring your Roth IRA to Canada, you need to file a one-time declaration and you cannot contribute any more to it.

Income Tax Folio S5-F3-C1, Taxation of a Roth IRA - Canada.ca

Benefits of Having a TFSA

The benefits of having TFSA include the following:

You can grow savings and not pay tax on the earnings in the account.
A TFSA allows for flexibility. If you need to take money out of your account, you can do so without penalty. And you do not lose the contribution room.

However, if you over-contribute to a TFSA, you will be subject to a 1% per month penalty tax on the highest amount in that month.

A TFSA is an excellent tool for a Canadian resident. But if you are a US person, you will need to speak to a cross-border accountant before considering a TFSA. There are some implications of which you must be aware.

Benefits of Having a Roth IRA

The benefits of having a Roth IRA include the following:

It reduces your future tax liability.
You can pass on wealth to your heirs through an inherited Roth IRA.
There is potential for tax-free growth on the earnings in the account.
There are no required minimum distributions.
You have the flexibility to withdraw what you have contributed without penalty or taxes.

Retirement in Canada vs. the US

Many of our clients who retire to Canada have either grown up in Canada or spent a portion of their career in Canada. It often feels like coming home to your roots, back to family and your connections. One of the major benefits of retirement in Canada vs the US is the healthcare system in Canada. In the back of your mind, you may be thinking of just how much your medical costs will be in the US when you get older. From an emotional standpoint, you may be thinking, what will the political climate be like? Will you be accepted and comfortable?

Also thanks to spending years working in the US and contributing to social security and your 401(k) plans, you are set up well for retirement in Canada due to the US Canadian dollar conversion.

However, when you retire to Canada, you may be surprised by the difference in the average Canadian Pension Plan, CPP cheque and the average social security monthly cheques.

When working in the US, you are contributing to Social Security and Medicare. As of 2021, the FICA tax is 7.65% off your paycheck, with the employer also paying 7.65% for a total of 15.3%. There is also an additional .9% tax for higher-income earnings. This tax is almost a forced savings, with the average social security cheque being $1500 US and the maximum $3148 US.

The average CPP monthly cheque in Canada is $689 CAD, and the maximum is $1203 CAD. The amounts will vary depending on your situation. Still, you will benefit from the currency conversion if you retire in Canada.

Summary of Key Points:

You cannot transfer a Roth IRA to a TFSA.
You need to follow certain rules when you bring your Roth IRA to Canada. Not following these rules can cause you to pay tax.
Make sure you do not contribute to a Roth IRA after you have moved to Canada.
Withdrawals from your Roth IRA are not taxed in the US as long as they are qualified distributions. You must be over 59.5 and have held the Roth IRA for more than 5 years.
A TFSA is a good option for Canadians. But if you are a US person, you should check with your cross-border accountant before opening a TFSA.
If you work with a cross-border financial advisor, you can have your Roth IRA managed while living in Canada.

Next Steps

If you’re planning your retirement and need help with wealth management, estate planning, and portfolio management, please get in touch. At SWAN Wealth we specialize in cross-border financial planning and wealth management.

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, SWAN Wealth Management, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund. Raymond James (USA) Ltd., member FINRA/SIPC. Raymond James (USA) Ltd. (RJLU) advisors may only conduct business with residents of the states and/or jurisdictions for which they are properly registered.

About the Author

Tiffany Woodfield is a dual-licensed financial advisor and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany specializes in advising clients who live both in Canada and the United States and need to simplify their cross-border financial plan, move their assets across the border, and optimize their investments so they can minimize their tax burden. Together Tiffany and John Woodfield help their clients simplify their cross-border finances and create long-term revenue streams that will keep their assets safe whether they live in Canada or the US.

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