TFSAs, or Tax-Free Savings Accounts, can be excellent tax-sheltered accounts that allow contributed funds to grow tax-free. That means no taxes on interest earnings, dividends, or capital gains. What's more, funds can be withdrawn at any time without penalty for account holders.
The Canadian equivalent of a Roth IRA is a TFSA. Although the plans have differences, there are significant similarities. A Roth IRA and a TFSA are funded with after-tax dollars, and the growth and income earned in the account can be free from taxation if the rules are followed.
U.S. citizens who reside in Canada may establish registered accounts such as a RRSP, RESP or TFSA.
A TFSA may be classified a foreign grantor trust for a U.S. person who makes contributions to the plan. A TFSA is not a tax-free account from a U.S. tax perspective. U.S. income tax applies annually on investment income, including realized capital gains, earned in the plan.
U.S. Equivalent of the TFSA — Meet the Roth IRA. The Roth IRA is equivalent to the Canadian TFSA. Any contributions that you do make in those accounts are all post-tax.
Generally, interest, dividends, or capital gains earned on investments in a TFSA are not taxable either while held in the account or when withdrawn.
A TFSA is similar to a Roth individual retirement account in the United States, although a TFSA has no withdrawal restrictions, such as the unqualified withdrawal penalty of the Roth IRA.
That is because the United States does not recognize a TFSA similar to an RRSP or RRIF for tax deferral purposes –and therefore even though the stock and bonds may be wrapped in a TFSA, they would still presumably be taxable unless the taxpayer was to make a treaty election if they qualify.
An RRSP can be considered the Canadian equivalent of the American 401(k), and vice versa. Both are retirement plans designed to encourage savings with similar tax benefits.
With the Roth IRA, the money you contribute isn't tax-deductible. That means you don't report Roth IRA contributions on your tax return, and you can't deduct them from your taxable income. Instead, you pay taxes on the money before you put it into the account, and your investment grows tax-free.
Is there a U.S. side to a TFSA? Yes, you can hold and settle trades in U.S. dollars in your TFSA. You can also contribute and withdraw in U.S. dollars if you have an RBC U.S. dollar bank account.
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.
TFSA earnings are subject to U.S. income tax. You must include any earnings from your TFSA as taxable income on your U.S. income tax return, and a direct foreign tax credit cannot be recouped as there is no Canadian tax incurred on them. Special filing requirements apply to specific investments.
The main difference with a TFSA is that although you don't get a tax break when you contribute, you would not pay any capital gains tax to the Canada Revenue Agency (CRA) when money is withdrawn. Despite the name, tax-free savings accounts do more than what savings accounts can do.
Tax Benefits: Capital gains are tax-free in a TFSA, allowing for long-term growth.
If you've been setting aside money in a Tax-Free Savings Account (TFSA) and you've met your goal, it's time for the next step in the process — withdrawing your funds. When you're ready to make a withdrawal, you can take out as much as you want from your TFSA without any penalties or taxes.
Unfortunately, TFSA contributions can't be used to lower your taxable income. This means there is no way to decrease your income tax when contributing to a TFSA. For high income earners this makes an RRSP more appealing.
TFSA – Although the income earned in a TFSA is tax- free for Canadian tax purposes, the income earned is taxable for US income tax purposes and may therefore not always be a recommended investment vehicle for a US citizen.
The easiest way to avoid the 30% tax-withholding is to use your National Identification Number (NIN). The NIN is also usually used as a Tax ID in many countries. If you're French, this would be your INSEE code, if you hold a UK passport, it's simply called just that – a NIN.