What is the Roth IRA equivalent in Canada?

By Arthur Dubois | Published on 11 Jul 2023

a cartoon of a person thinking about a piggy bank

If you’re looking for a retirement savings plan, you may be wondering if there’s an equivalent to the popular Roth IRA (individual retirement account) in the United States. The answer is yes, and it’s called the Tax-Free Savings Account (TFSA).

Understanding the Roth IRA in the United States

The Roth IRA is a popular retirement savings plan in the United States that allows individuals to contribute after-tax money that grows tax-free. This type of IRA is different from a traditional IRA because you don’t get a tax deduction for contributions, but you also don’t have to pay taxes on withdrawals in retirement.

If you are someone who expects to be in a higher tax bracket in retirement, a Roth IRA may be a good option for you. Additionally, if you value flexibility in your withdrawals, a Roth IRA can be a great choice.

Key features of a Roth IRA

Some of the key features of a Roth IRA include:

  • Tax-free growth: The money you contribute to a Roth IRA grows tax-free, which means you don’t have to pay taxes on any of the earnings or interest your account generates.
  • Flexible withdrawals: Unlike other retirement accounts, there are no required minimum distributions with a Roth IRA. This means you can leave your money in the account to grow for as long as you want.
  • No minimum distributions: With a Roth IRA, you are not required to take a certain amount of money out of your account each year, which can be a huge benefit if you don’t need the money right away.

Benefits of a Roth IRA

One of the biggest benefits of a Roth IRA is the tax-free growth. This means that you get to keep more of your money in retirement. Additionally, because withdrawals are not required, you can leave the money in there to grow as long as you want. Finally, because you contribute after-tax dollars, you can withdraw your contributions at any time without penalty or taxes.

Another benefit of a Roth IRA is that it can help you diversify your retirement portfolio. If you have other retirement accounts that are tax-deferred, like a traditional IRA or a 401(k), a Roth IRA can give you a source of tax-free income in retirement.

Contribution limits and eligibility

For 2023, you can contribute up to $6,500 per year to a Roth IRA, or $7,500 if you’re age 50 or over. However, your income must be below a certain threshold to contribute the full amount. If you earn too much, your contribution limit may be reduced or eliminated.

It’s important to note that there are income limits for contributing to a Roth IRA. For 2023, if you are single and your modified adjusted gross income (MAGI) is over $153,000, you cannot contribute to a Roth IRA. If you are married and filing jointly, your MAGI must be under $218,000 to contribute the full amount. If you are close to these MAGI cut-offs, you may also be eligible to contribute a reduced amount, so please double-check based on the year at hand. 

Overall, a Roth IRA can be a great option for those who want tax-free growth and flexibility in their retirement savings plan. If you’re interested in opening a Roth IRA, talk to a financial advisor to see if it’s the right choice for you.

Introducing the Tax-Free Savings Account (TFSA) in Canada

The TFSA (Tax-Free Savings Account) is a savings account that is similar to the Roth IRA in the United States. Like the Roth, it lets you contribute after-tax dollars and grow your money tax-free. However, there are some key differences.

If you’re a Canadian looking for a way to save money and reduce your tax burden, the TFSA might be just what you need. With its tax-free growth and flexible withdrawal options, the TFSA is an excellent tool for building your savings and achieving your financial goals.

How the TFSA works

The TFSA is a savings account that lets you contribute up to a certain amount each year. You can invest your contributions in a variety of investments, including stocks, bonds, and mutual funds. The growth on your investments is tax-free, and withdrawals are also tax-free.

One of the great things about the TFSA is that you can use it to save for any goal, whether it’s a down payment on a house, a dream vacation, or your retirement. And because you can invest in a wide range of assets, you have the potential to earn higher returns than you would with a traditional savings account.

Benefits of a TFSA

The biggest benefit of a TFSA is tax-free growth. Because you are not taxed on your investment earnings, you get to keep more of your money. Additionally, because withdrawals are tax-free, you have more flexibility in how you use the money. Finally, unlike a retirement account, you can withdraw your money at any time without penalty.

Another benefit of the TFSA is that it can be a great way to diversify your investments. Because you can invest in a range of assets, you can spread your risk and potentially earn higher returns than you would with a single investment.

Contribution limits and eligibility

The contribution limit for a TFSA is $6,500 per year for 2023, and any unused contribution room can be carried forward to future years. This means that if you don’t use your full contribution limit in one year, you can carry over the unused amount to the next year and contribute even more. Additionally, there are no income requirements to open a TFSA, so anyone can take advantage of this tax-free savings opportunity.

It’s important to note, however, that there are penalties for over-contributing to your TFSA. If you exceed your contribution limit, you will be subject to a tax of 1% per month on the excess amount until it is removed from your account.

In conclusion, the TFSA is an excellent savings tool for Canadians who want to reduce their tax burden and build their wealth. With its tax-free growth, flexible withdrawal options, and wide range of investment opportunities, the TFSA is a must-have for anyone looking to achieve their financial goals.

Best TFSA accounts in Canada

Choosing where to open your Tax-Free Savings Account (TFSA) is a critical decision that can impact your financial growth. Whether you’re an active investor, a hands-off saver, or somewhere in between, Canada offers a multitude of options. Let’s delve into four of the best places to open a TFSA account in Canada.


QTrade Investor is one of Canada’s top-ranked online brokers, offering a broad range of investment options for your TFSA. From stocks, bonds, ETFs to mutual funds, QTrade provides access to an extensive selection of investments. This platform stands out for its excellent customer service, comprehensive investor education, and competitive pricing. For those looking to manage their own investments, QTrade is a strong choice.

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For self-directed investors who want to take charge of their TFSAs, Questrade is an excellent option. Questrade offers a robust online trading platform, allowing you to invest in stocks, bonds, ETFs, and mutual funds across North American markets. Known for its low fees and no-charge purchasing of ETFs, Questrade is ideal for active traders seeking to maximize their TFSA returns.

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If you prefer a hands-off approach to investing, Wealthsimple is worth considering. As Canada’s most prominent robo-advisor, Wealthsimple offers both managed and self-directed TFSA options. Under the managed option, Wealthsimple takes care of the investing for you. After filling out a brief questionnaire about your financial goals and risk tolerance, Wealthsimple builds and manages a diversified portfolio for you. It uses a mix of ETFs to balance risk and grow your money over time, making it a great choice for novice investors or those who prefer automated investing.

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Comparing the Roth IRA and the TFSA

While there are many similarities between the Roth IRA and the TFSA, there are also some key differences. Here are a few. 

Similarities between Roth IRA and TFSA

  • Contributions are made on an after-tax basis
  • Growth is tax-free
  • Withdrawals are tax-free
  • Depending on where you open your Roth IRA or TFSA, both accounts may be eligible for federal insurance through the U.S. Federal Deposit Insurance Corporation (FDIC) or the Canada Deposit Insurance Corporation (CDIC) 

Differences between Roth IRA and TFSA

  • Contribution limits can be different. While they are both $6,500 in 2023, those above 50 years of age in the United States can contribute up to $7,500. These numbers are in the countries’ respective currencies, which means US Dollars apply to the Roth IRA limit where as the $6,500 limit for the TFSA is in CAD. 
  • Income limits may restrict contributions to Roth IRA. For example, if you’re a single tax filer and your income is more than  $153,000 in 2023, you can’t contribute to a Roth IRA. There are no income restrictions for contributing to a TFSA.
  • The TFSA can be used for short-term or long-term savings goals, such as a down payment on a house or a vacation. The Roth IRA, on the other hand, is primarily for retirement savings. 

Which account is better for different financial goals?

The choice between a Roth IRA and a TFSA depends on your individual financial goals and circumstances. If you’re looking primarily for retirement savings, the Roth IRA may be the better choice. With no required minimum distributions and tax-free growth and withdrawals, it’s a great way to build a nest egg for your golden years. 

However, if you want more flexibility in how you use the money, the TFSA may be a better fit. With no income restrictions and the ability to use the money for any savings goal, it’s a great option for short-term or long-term savings.

Other Canadian Retirement Savings Options

While the Tax-Free Savings Account (TFSA) is a popular choice for retirement savings in Canada, there are also other options available that may better suit your needs depending on your financial situation and goals. Here are some other retirement savings options to consider:

Registered Retirement Savings Plan (RRSP)

The RRSP is a retirement savings plan that lets you contribute pre-tax dollars that grow tax-free. You pay taxes on withdrawals in retirement. It’s a good choice for those who expect to be in a lower tax bracket in retirement. One of the benefits of an RRSP is that you can contribute up to 18% of your earned income from the previous year, up to a maximum of $29,210 for the 2022 tax year. This means that if you have a high income, you can contribute more to your RRSP and potentially reduce your taxable income.

Another benefit of an RRSP is that you can use the funds to purchase a home through the Home Buyers’ Plan (HBP) or to fund your education through the Lifelong Learning Plan (LLP). With the HBP, you can withdraw up to $35,000 from your RRSP tax-free to put towards the purchase of your first home. With the LLP, you can withdraw up to $10,000 per year, to a maximum of $20,000, to fund your education or that of your spouse or common-law partner.

Locked-In Retirement Account (LIRA)

The LIRA is a retirement savings plan that is similar to the RRSP, but the money is “locked-in” and can only be used for retirement. LIRAs are typically created when funds are transferred from a pension plan, and they are subject to the same contribution limits as an RRSP. One of the benefits of a LIRA is that the funds are protected from creditors in the event of bankruptcy or financial difficulty.

Pooled Registered Pension Plan (PRPP)

The PRPP is a retirement savings plan that is offered by some employers. It’s similar to a 401(k) in the United States. Contributions are made on a pre-tax basis, and the money grows tax-free. Like an RRSP, you pay taxes on withdrawals in retirement. One of the benefits of a PRPP is that it is a low-cost option, as the fees associated with managing the plan are typically lower than those of an RRSP. Another benefit is that it is a portable plan, meaning that if you change jobs, you can transfer your PRPP to your new employer’s plan or to an individual RRSP.

How to Choose the Right Retirement Savings Plan for You

Choosing the right retirement savings plan is a crucial decision that can have a significant impact on your financial future. While there are several options available, it’s essential to select a plan that aligns with your financial goals and needs. Here are a few things to consider when choosing a retirement savings plan. 

Assessing your financial goals and needs

Before selecting a retirement savings plan, it’s essential to assess your financial goals and needs. Think about what you want to accomplish with your retirement savings. Do you want to save primarily for retirement, or do you want more flexibility in how you use the money?

If you’re looking for flexibility in how you use your retirement savings, a taxable investment account, or a TFSA, may be a better option. However, if you’re looking to save primarily for retirement, a tax-advantaged retirement account may be a more suitable choice, such as the RRSP.

Evaluating tax implications

Another crucial factor to consider when selecting a retirement savings plan is the tax implications. Consider whether you’re in a high or low tax bracket now and whether you’re likely to be in a higher or lower tax bracket in retirement. This can help you determine whether a traditional or Roth account (or a combination) makes more sense for you.

A traditional 401(k) or Canadian RRSP allows you to contribute pre-tax dollars, which reduces your taxable income in the current year. However, you’ll pay taxes on the money when you withdraw it in retirement. On the other hand, a Roth 401(k) or TFSA allows you to contribute after-tax dollars, which means you won’t get an immediate tax break. However, you won’t pay taxes on the money when you withdraw it.

Diversifying your retirement savings

It’s also essential to consider diversifying your retirement savings. Consider spreading your retirement savings across multiple accounts, such as a 401(k), an IRA, and a TFSA. This can help you minimize risk and maximize returns.

Furthermore, diversifying your investments within each account can also help you minimize risk. Consider investing in a mix of stocks, bonds, and mutual funds that align with your risk tolerance and investment goals.

In conclusion, choosing the right retirement savings plan requires careful consideration of your financial goals and needs, tax implications, and diversification strategies. By taking the time to assess your options and make an informed decision, you can set yourself up for a financially secure retirement.

Arthur Dubois is a personal finance writer at Hardbacon. Since relocating to Canada, he has successfully built his credit score from scratch and begun investing in the stock market. In addition to his work at Hardbacon, Arthur has contributed to Metro newspaper and several other publications