The Roth IRA is equivalent to the Canadian TFSA.
Any contributions that you do make in those accounts are all post-tax. That means you have earned your paid tax on this income and you are contributing to these after taxes, therefore any earning in those accounts are all after tax meaning your distributions will not be taxable.
Just like with a TFSA, you contribute post-tax earnings and when they are distributed they are not taxed, just like the Roth IRA. So, both accounts have the same tax status.
Contribution Limits
In Canada, the TFSA contribution limits are on an annual basis, with any unused room carrying forward in eligibility for the next year. So, this means contributions can very where someone has, say, an $8,000 contribution for one year and then $7,000 or $10,000 the next year. If you’ve only used $5,000 in a year, you will have $15,000 or $14,000 more in contribution room the following year.
This is not the case for the Roth IRA. The Roth IRA contribution limits are on a year-to-year basis, and any remainder in the contribution room does not roll over to the following year. So, if you are eligible to make the contributions, make sure you make the contributions because if you don’t, you’ll lose them.
Income Limits
There is no income limitation on the Canadian side in terms of contributions.
However, with the Roth IRA in the U.S., if your income is above a certain threshold, you are no longer allowed to make contributions. This can happen suddenly and cause tax issues in some years.
Withdrawal Limits
On the Canadian side, in terms of distributions, you can withdraw money from the TFSA account without any problems. There is no age limit. You can withdraw money and close your account without any issues.
In the U.S., however, the account must be 5 years old, and you have to be more than 59 and 1/2 years of age in order to withdraw money without a penalty. So, if you take an early withdrawal in the U.S., you will be paying a penalty. There are a few circumstances in which you can withdraw in year five (typically for certain home purchase and medical expenses), but it is extremely limited.
No Regulation or Recognition of TFSA on the U.S. Side
The IRS doesn’t have any regulation for the TFSA account on the US side. So, any earnings that you do have in the TFSA account get taxed in the USA, even if you are a non-resident of Canada. (Remember, you cannot contribute to a TFSA as a non-resident of Canada, or you’ll be penalized 1% on the contribution every month).
Let’s say if you’ve moved to the U.S. The U.S. has the right to tax you, and you still have to report the income your TFSA earns, whether those are in mutual funds or another investment. These are considered passive foreign investment companies which are reported on a separate form in the U.S. So, make sure that before you move you simplified your investments and retirement accounts before you head South to Work.
If you plan ahead, then you can save a lot of headache, a lot of penalties, and a lot of stress.
Make sure that you’re able to talk to someone before you come. So if you have any questions before moving reach out to us, we’ll be happy to help you and then get you in a better place.
Planning cross-border retirement with an expert CPA is the surest way to make sure you are covered. We maintain offices in Toronto and Houston, and our team is here to help.
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