Lately I’ve been reading more about the Roth IRA on good posts like the ones over at Financial Nut or NoDebtPlan. It has struck me — and I could be wrong, I’ll have to gather more details, maybe from you, dear readers, below — that Canada’s TFSA (tax-free savings account) is a rough equivalent to the Roth IRA.
Here are some of the basic details of the new TFSA, which was just introduced in Canada in late 2008 (I believe you were able to open TFSAs starting January 1, 2009 – I opened mine around the 10th or so):
- contribute up to $5,000/year of your after-tax dollars
- withdraw up to the full amount of your account with no penalty
- your money grows tax-free: don’t pay for dividends or interest or capital gains!
- your money is not taxed when you take it out
- you can recontribute the amount you withdrew at anytime, plus your $5,000 allotment for that year
- invest in stocks, bonds, funds, ETFs, cd’s, trusts
The TFSA is a new financial entity for Canadians. Prior to the TFSA only RRSPs (Registered Retirement Savings Plans) were available as tax alleviation vehicles, and in that case, your money grows tax-free, but you pay tax on it when you take it out! So with RRSPs, you’re taxed twice. That is really undesirable.
According to the latest stats, only about 20% of Canadians have started a TFSA so far. That number is sure to grow as the public learns more about them. I think they’re a no-brainer.
You can’t avoid being taxed initially on your income, but with a TFSA, you at least have the possibility of making back what you paid in tax in the form of capital gains and dividends and interest.
If you’re Canadian, have you opened a TFSA yet? Or for Americans, do you use a Roth IRA? If not, why not? For me the only question is why us Canadians haven’t had a TFSA option available to us sooner. The Roth IRA has been around forever, it seems, in the U.S. Well, at least we have one now! In future posts I’ll talk about how I’m using my TFSA and strategies for optimize it as an income-producing vehicle.
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