As most of us have heard by now, Canada’s Liberal government decided to roll back the 2016 Tax-Free Savings Account (TFSA) contribution limit to $5,500, which was the limit in 2014 before the Conservative government increased it to $10,000 in 2015. As cross border financial planners, this has led us to reflect on the TFSA and how it measures up when compared to the most similar savings vehicle available south of the border, the Roth Individual Retirement Account (Roth IRA).

While the basic premise behind both accounts is the same (i.e. forgoing current income tax deductibility so savings can grow in a completely tax-free environment), there are some key differences in rules pertaining to both contributions and withdrawals. Our cross border comparison reveals that Canadians generally have it much better when it comes to tax-free savings vehicles: the TFSA offers far greater flexibility than the Roth IRA. That said, the Roth IRA offers U.S. taxpayers a potentially advantageous conversion feature with no equivalent feature available to Canadian taxpayers with TFSAs.

What is the TFSA?

TFSAs were first introduced in Canada by then Finance Minister Jim Flaherty in the 2008 budget, and came into effect on January 1, 2009. Receiving wide acclaim from taxpayers and economists alike, the TFSA proved to be a popular and welcome enhancement to Canadians’ ability to save up for the future without being impacted by taxation.

Unlike Registered Retirement Savings Plans (RRSPs), which have existed in Canada since 1957, the new promise of the TFSA was to go beyond mere tax deferral to true tax sheltering. With tax deferral, the government gives you the up-front benefit of tax savings but ends up collecting it back from you years later. With tax sheltering, there are no tax consequences whatsoever on accumulated growth. In this way, TFSAs and RRSPs are opposites: RRSPs allow for immediate tax deductions with a deferred tax impact upon withdrawal, while a TFSA does not allow for any deductions on contributions, but has no tax impact on the way out.

What is the Roth IRA?

In the U.S., former Delaware Senator William Roth Jr. was the legislative sponsor of the bill that introduced a tax-sheltered savings account; tax deferral had already been a feature of traditional IRAs since 1974. Passed under the Taxpayer Relief Act of 1997, the Roth IRA was introduced as an enhancement to traditional IRAs: it provides U.S. taxpayers with relief from income tax on accumulated growth, and withdrawals on retirement aren’t taxed as long as certain conditions are met. Like the TFSA, the Roth IRA has become a popular retirement savings vehicle used by millions of taxpayers.

What are the Differences Between the TFSA and the Roth IRA?

Annual Contribution Limits

The Roth IRA began in 1998 with a $2,000 USD annual contribution limit, which has increased gradually over the years. With the passing of the Economic Growth and Tax Relief Reconciliation Act of 2001, additional catch-up contributions beyond the regular limit became available for those aged 50 and over. The contribution limit for those aged 50 and over is currently $6,500 USD, $1,000 USD more than the $5,500 USD limit for those aged 49 and under.

TFSA limits, by contrast, are the same for everyone regardless of age. When the TFSA was introduced in 2009, the contribution limit was $5,000 with annual indexing set to occur in $500 increments to account for inflation. In 2013, the limit increased to $5,500, where it stayed until the Conservative government’s 2015 increase to $10,000. The new Liberal government expects to save over $1 billion over the next four fiscal years by rolling the limit back to $5,500.

While the annual limits may be similar, the major differences between TFSAs and Roth IRAs have to do with contribution availability and withdrawal flexibility.

Contribution Availability

All Canadian taxpayers over 18 years of age with a Social Insurance Number are able to contribute to TFSAs regardless of income level, with the same limits available to those at the very bottom of the income ladder as those at the very top.

In the U.S. however, contributions to Roth IRAs are not universally available to U.S. taxpayers since contribution availability depends on earned income. First, to take advantage of the current $5,500 USD limit, earned income for the year must be at least that amount. Furthermore, at higher income levels, Roth IRA contribution eligibility is phased out. In 2016, partial phase-out for single taxpayers begins at annual income of $117,000 USD with total phase-out occurring at income above $132,000 USD. For married taxpayers filing jointly, partial phase-out begins at $184,000 USD with total phase-out at income above $194,000 USD.

Withdrawal Flexibility

The second and most glaring difference between the two accounts has to do with withdrawal flexibility. In Canada, TFSA withdrawals are made extremely flexible: all money in the account, with no distinction made between contributions and earnings, can be withdrawn tax-free at any time without age restrictions and without penalties. The only stipulation is that a taxpayer must wait until the following calendar year to re-contribute the withdrawn amount.

Roth IRAs, however, offer far less flexibility on withdrawals. While contributions can be withdrawn at any time, earnings can only be withdrawn penalty and tax-free if at least five years have elapsed since the initial deposit. Additionally, since Roth IRAs were intended to fund retirement, the earnings can only be withdrawn as of age 59 ½ unless certain other exceptional criteria are met. Otherwise, the early withdrawal is subject to tax on the earnings as well as a 10% penalty.

Roth IRA Conversion

Another important difference between Roth IRAs and TFSAs is that Roth IRAs allow for an interesting strategy known as the Roth IRA conversion. This strategy is uniquely available to U.S. taxpayers; there is no Canadian counterpart with respect to TFSAs. In the U.S., a taxpayer who holds a tax-deferred retirement account such as a traditional IRA or a 401(k) is able to convert unlimited amounts from the tax-deferred account into a Roth IRA by rolling the funds over from the former account to the latter. The amount converted creates taxable income in the current year but can then grow tax-free in the future. This conversion strategy presents an opportunity for high income earners in the U.S. to get money into Roth accounts “through the back door” regardless of income level or annual contribution limits. From a cross border planning perspective, this can be an attractive strategy when one is moving from a lower tax jurisdiction to a higher one.


Despite the fact that the TFSA limit was reduced from $10,000 to $5,500 in 2016, we Canadians should consider ourselves fortunate that our tax-free savings vehicle is as flexible as it is, without the more rigid income limitations and withdrawal restrictions that apply to the Roth IRA south of the border. Nonetheless, the Roth IRA conversion is a potentially attractive planning strategy that is not available with the TFSA.

Talk to one of our advisors at MCA to explore how the advantages of moving to the US would be beneficial to you.


MCA Cross Border Advisors, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.