Is There an Equivalent to The Roth IRA in Canada?

A Roth IRA is a popular retirement investment account in the United States. Many investors and savers enjoy this individual retirement account option, because it allows you to contribute money post-tax, after which your growth is not subjected to income taxes or capital gains tax.

While a Roth IRA doesn’t exist in Canada, there is a Roth IRA equivalent many Canadians have opened: a tax-free savings account (TFSA). While a tax-free savings account isn’t exactly the same as a Roth IRA, it’s the closest Canadian counterpart and offers some benefits that a Roth IRA lacks.

Here’s everything you need to know about tax-free savings accounts and how they compare to US Roth IRAs.

What is a tax-free savings account?

A tax-free savings account is registered by the Canadian government and offers tax benefits. Unlike a traditional or high-interest savings account, you’re not required to pay taxes on interest earnings in a tax-free savings account.

Similar to a regular savings account, you contribute to a tax-free savings account with after tax dollars, meaning money that has already been subject to Canadian income tax. Anyone over eighteen with a valid SIN (Social Insurance Number) can open a tax-free savings account in Canada.

You can withdraw from a TSFA like you would from a normal savings account. But you can also invest your money in guaranteed interest certificates (GICs) or other investment options (like mutual funds).

How a TFSA works

The Canadian government initiated tax-free savings plans in 2009 as a tax-free way to encourage Canadians to save more. Tax-free savings plans have annual contribution limits but also allow you to carry over any unused contribution room from previous years.

For 2024, the annual contribution limit for TFSAs is $7,000. Any unused contribution room from previous years can be added on to this limit.

Unlike the other main registered savings accounts in Canada, registered retirement savings plans don’t allow you to deduct your contributions from your taxable income on your tax returns. But you also won’t have to pay taxes on your money when you withdraw your funds.

You can open a TFSA at any time at a qualifying Canadian bank, credit union, investment firm, brokerage, or other financial institution. You can choose to keep your TFSA as a savings account only, invest in the equities or the stock market, or do both.

Do tax-free savings accounts lower your taxable income?

No, since you contribute to a TFSA with post-tax dollars, you’re not eligible to lower your taxable income by deducting these contributions. Other retirement accounts in Canada, however, are eligible for tax deductions. You can deduct contributions to a registered retirement savings plan to lower your taxable income in Canada.

What is a Roth IRA?

A Roth IRA is a type of individual retirement account available in the United States. You contribute post-tax money, which means any growth and interest accumulated in the account are tax-free. You won’t pay taxes when you withdraw your funds, unlike a 401(k) in the US or a registered retirement savings plan in Canada.

Unlike workplace 401(k)s or traditional IRAs, you typically open a Roth IRA on your own at a participating bank, credit union, investment firm, brokerage, or other financial institution. You may be able to roll part of your 401(k) or IRA into a Roth IRA.

How does a Roth IRA work?

A Roth IRA is a type of investment that you contribute into to earn interest or returns on your money long-term. It’s a type of retirement savings account in the US and can be held in addition to other retirement plans, like a 401(k) or traditional IRA.

Roth IRAs have annual contribution limits set by the Internal Revenue Service (IRS). This limit is generally linked to inflation. For 2024, you can contribute up to $7,000 in an individual retirement account. Those 50 and older can contribute $8,000. This limit is across all IRAs (both traditional and Roth IRAs).

Unlike the Canadian tax-free savings account, if you do not hit your contribution limit in a given year, your unused contribution room does not carry over to the next year.

You can contribute into a 2024 Roth IRA until April 15, 2025, giving you more time to max out your IRA.

Are Roth IRA contributions eligible for a tax deduction?

No, in most cases, your Roth IRA contributions are not tax-deductible. That’s because Roth IRAs are funded with after tax dollars. Traditional IRAs, however, are typically funded with pre-tax dollars and are generally eligible for tax deductions.

Who can open a tax-free savings account in Canada?

If you’re over the age of eighteen and have a valid Social Insurance number (SIN) in Canada, then you’re eligible to open a tax-free savings account. Approximately 58% of Canadians have opened a TFSA, according to a 2023 RBC study.

You don’t need to be employed or have a high credit score to open this savings account. There are no income caps preventing Canadians from opening a TFSA.

Who can open a Roth IRA in the US?

In the US, as long as you earn income and meet income requirements, you can open a Roth IRA.

If you’re a single tax filer in the US, you can contribute the full amount ($7,000) into an IRA as long as you make $146,000 per year or less. You can contribute as a single filer at a reduced capacity up to an annual gross income of $161,000 or less. If you make over this amount, you’re not eligible to open or contribute to a Roth IRA.

Here’s a full list of the IRS’s 2024 income thresholds for contributing to a Roth IRA:

• Filing status

• 2024 income limits

• 2024 contribution limits

• Single, head of household, or married, filing separately

  • $146,000 or less

  • Up to $7,000 ($8,000 if 50 or older)

  • $146,001 through $160,999

• Reduced contribution

  • $161,000 or more

  • Not allowed

• Married filing jointly or qualifying widow/widower

  • $230,000 or less

  • Up to $7,000 ($8,000 if 50 or older)

  • $230,001 through $239,999

• Reduced contribution

  • $240,000 or more

  • Not allowed

Can Canadians open a US Roth IRA account?

In most cases, a Canadian could not open and contribute to a Roth IRA. You need to be earning US income and meeting US income requirements to qualify for a Roth IRA account.

However, if you were previously a US resident who held a Roth IRA account, you can continue to hold on to that account and take advantage of its tax benefits. While your money can still invest and grow, you would not be able to keep contributing to that account.

What other retirement savings accounts can Canadians open?

A tax-free savings plan is one of the two registered savings accounts available for Canadians. But there are other savings accounts that can help you save for long-term goals like retirement or short-term goals like building an emergency fund.

Here are a few of the top savings plans in Canada:

Registered retirement savings plan

Similar to a 401(k) in the states, a registered retirement savings plan is also sponsored by the government and offers tax advantages. Like a 401(k), you invest pre-tax dollars into an RRSP, and can deduct your contributions to lower your taxable income.

A registered retirement plan has some similarities to a tax-free savings account. There is an annual contribution limit ($31,560 for 2024), and you can roll over any unused contribution room from previous years. Unlike a TFSA, there’s also an excessive contribution limit that lets you save up to $2,000 beyond your yearly limit. There’s no lifetime cap on how much you can contribute to an RRSP, though there is a lifetime cap on TFSAs.

Both an RRSP and a TFSA can be set up as savings accounts, investment accounts, or both. While you open a TFSA on your own, an RRSP can be opened by an individual or an employer. And employers can contribute into your retirement savings plan, helping you maximize your annual contributions.

When you withdraw funds from an RRSP, you’ll pay taxes on your money. You won’t pay taxes when you withdraw from a TFSA. Once you turn 71, your retirement savings account will turn into a registered retirement income fund, which will let you withdraw a monthly stipend.

If you’re a newcomer to Canada, you can qualify for an RRSP after you file your first income tax return.

You can open a TFSA in addition to an RRSP to help further fund your retirement.

Traditional investment account

If you have more money to contribute to a retirement fund than the yearly contribution allowance, you might be interested in opening a traditional investment account. You won’t be limited to how much you can invest, but you will lose some tax incentives.

You can open an investment account online with a brokerage or investment firm. You might decide to self-direct your portfolio and actively manage your investments or have a brokerage or financial advisor manage your portfolio on your behalf.

You may be able to earn more in an investment account than you can in an RRSP, but it is risky. Make sure you talk to a financial advisor before transferring funds into this type of account.

High-interest savings account

If you’re looking to supplement your income in retirement or if you’re interested in saving money for short-term goals now, a high-interest savings account may make sense. Similar to a tax-free savings plan, a high-interest account lets you capitalize on savings rates to grow your money even more. Right now, you can find savings interest rates in Canada above 5% annual percentage yield.

You won’t be limited by the yearly contribution maximum a tax-free savings account comes with, but you also won’t receive tax benefits. You’ll be required to pay taxes on any interest you earn in a high interest savings account.

You don’t have to choose between one or the other either. You could max out your tax-free savings account and put any additional funds into a separate high interest savings account. This way, you’re taking advantage of the tax advantage of a TFSA while still earning a high rate on your savings.

Guaranteed interest certificate

Suppose you want to capitalize even further on the high interest rates Canada is seeing right now. In that case, you might want to earn a fixed-interest rate by locking in a guaranteed interest certificate (GIC). In exchange for locking your money away with a bank or financial institution for a set period of time, you’ll earn a fixed-interest rate on your money — offering you a more predictable return than other investment types.

You can invest money in your TFSA into a GIC, but if you want to invest beyond the $7,000 yearly limit, you might want to open a separate GIC account at a bank. Like high interest savings accounts, any individual GICs you open are subject to taxation. You’ll pay taxes on any returns you earn from this investment.

A GIC can be a good savings option for money earmarked for a specific goal that you don’t need right away.

Alternative savings options to explore beyond tax-free savings accounts

Although you typically can’t open a Roth IRA in Canada, exploring all available savings options can help you grow your money for short- and long-term savings goals. Whether you’re looking to buy a new vehicle, renovate your home, planning a family vacation, saving for a wedding, or just saving to build a nest egg, diversifying your savings strategy can help you get better prepared.

While your credit score doesn’t directly impact your ability to save for retirement, it can cost you high annual percentage rates and other fees associated with financing costs on mortgages and loans. That means building your credit score up can actually help you save money over time — freeing up more dollars to put towards your savings goals.

An alternative savings method, like KOHO can help you do both — build your credit up with access to your free credit score, while helping you earn a return on your money with a high interest savings account. KOHO functions as a spending and savings account, has coverage for overdrafts and offers virtual credit card access to keep you protected when making purchases online.