Wednesday, February 27, 2008

Tax Free Savings Account: a Roth account for Canadians?

Wow, a lot can change when you spend a week on the couch. The federal government released the 2008 budget yesterday, and the news on everyone's lips (well, maybe not everyone, but at least on most Canadian PF bloggers' lips) is the creation of a new tax-advantaged savings plan, the TFSA. I hate to be a day late and a dollar short, but I can't go without commenting on this.

I've written before about the savings plans available in Canada and the US, and where the RRSP has a close cousin in the IRA, and the RESP is analogous to the 529 plan, the one savings vehicle unique to the United States is the Roth IRA. While the IRA (like the RRSP) is funded with pre-tax dollars, and withdrawals at retirement are fully taxed at the marginal rate, the Roth IRA is funded with after-tax dollars, and withdrawals at retirement are not taxed.

Well, the Roth account seems to have a new cousin (by marriage) in the proposed TFSA. Although not designated as a retirement account, the workings of the TFSA seem comparable to those of the Roth IRA: you can contribute up to $5,000 per year to a TFSA, and the income you earn in the account is not taxed. You can withdraw from the account at any time without penalty, and doing so actually frees up your contribution room again, so you can "re-fill" the account.

I'm finding it very difficult to find a downside here. The TFSA seems to be the ideal place for Canadians to keep their Emergency Funds. There's obviously a lot to be worked out here. I'm not sure what investments can be held in a TFSA, and what sort of interest rates will be paid on "cash" investments, but it sounds like a fantastic idea.

And it's nice to tie up a loose end by finding a dancing partner for the Roth account.

1 comment:

Anonymous said...

So I'm not crazy? They are similar!

After listening to Dave Ramsey for months, this Canadian's got US terms on the brain.

Like you, I see no downside but my financial advisor doesn't seem so hot on the idea and says it's "not for everyone."

It's for me, though!

Thanks for breaking it down; you've been bookmarked!