Roth IRA Canada: Is it Available to Canadians?

A Roth Individual Retirement Account, or Roth IRA, is a special type of savings account that allows Americans to contribute money each year and withdraw tax-free in the future.

Roth IRAs are unique when compared to regular IRAs due to how taxation works.

With traditional IRAs, contributions are made using pre-tax income, meaning you will get a tax deduction when you deposit money.

However, contributions to Roth IRAs are made using after-tax dollars, meaning there are no immediate tax deductions at the time of contribution.

As a tradeoff, Roth IRA withdrawals are tax-free.

This means that investments in Roth IRAs can grow for decades and then be withdrawn without any taxes.

There are limits to contributions each year that are set out by the Internal Revenue Service (IRS).

Since 2019, the limit has been $6,000 per year or $7,000 for those over 50.

Before that, the limits were $5,500 per year and $6,500 for those over 50.

This contribution room does not carry over to the following year, meaning that contributing as close to the limit every year is the best strategy for long-term growth.

Did you know?

The Roth IRA was named after U.S. Senator William Roth from Delaware. The idea for a tax-free withdrawal account was first proposed in 1989 and eventually made its way into law through the Taxpayer Relief Act of 1997.

Can Canadians Get Roth IRAs?

No, generally Canadians cannot open Roth IRAs, however there is one exception.

Canadian citizens who work in the United States can be eligible to open Roth IRAs.

In this case, only income earned in the U.S. would be eligible for contributions into a Roth IRA.

Aside from this, Canadian citizens are excluded from opening Roth IRAs.

However, there are a few registered account types created by the Canadian government that serve similar purposes. 

Canadian Equivalent To The Roth IRA

In many ways, the Tax-Free Savings Account (TFSA) operates similarly to a Roth IRA.

In both cases, contributions to the accounts are made using post-tax income.

This means that there are no tax deductions on contributions.

In contrast, traditional IRAs that allow for pre-tax contributions most closely mirror the Registered Retirement Savings Plan (RRSP) in Canada 

Pennies stacked showing investment growth

TFSA vs Roth IRA

The main similarity between a TFSA and a Roth IRA is how taxes work when contributing and withdrawing money.

For both accounts, deposits are made with after-tax income, and withdrawals are tax-free.

While there are no immediate tax benefits from these two types of accounts, tax-free growth on investments is a great way to create a nest egg for retirement.

Not only are the accounts excellent for retirement, but they can also be accessed anytime without penalty.

This allows both TFSA and Roth IRAs to double as an emergency fund that can be withdrawn from in times of need.

Both account types are also similar in terms of the types of investments that can be held.

In both a TFSA and Roth IRA, mutual funds, stocks, bonds, and ETFs can all be held.

As accounts meant for long-term investment, this variety allows for many different investment strategies to be executed.

From growth stocks to dividend stocks to long-term bonds, flexibility is one of the greatest benefits of these two accounts.

In terms of differences, one of the main things that set the two apart is the way the contribution room works.

For Canadians, the TFSA contribution room can be carried over every year.

This means that if a Canadian does not put any money into their TFSA in any given year, they still accumulate the contribution room, which can be used in future years.

With Roth IRAs, the contribution room for each year can only be used in that given year.

Another difference is that Roth IRA contributions can only come from earned income.

This differs from TFSAs, where contributions can come from savings.

This means that Americans can not contribute more to their Roth IRAs than what they earned in that year.

On the other hand, Canadians can earn no income in a tax year and still contribute to their TFSAs using funds from their savings account.

Frequently Asked Questions

  • Can you open a Roth IRA in Canada?
  • Can you lose money in a Roth IRA?
Baggio Ma

Baggio has been investing for nearly a decade, using the perspectives gained from his work experience in the private, public, and non-profit sectors to shape his investment outlook. He has a specific interest in the potential of emerging disruptive technologies and their impact on the future.