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4 in 10 Canadians favor Roth IRA-like savings accounts

by Warren S. Hersch

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More than 4 in 10 Canadians say they would invest in a Roth IRA-like tax-free savings account if given a limited amount of money to invest, according to a new survey from Toronto-based BMO Financial Group.

The survey of reveals that 42 percent of Canadians would invest in a TFSA, five percentage points more than the 37 percent who say they would contribute towards a registered retirement savings plan. An RRSP is Canada’s equivalent of 401(k) plan or, if not an employer-sponsored group or pooled plan, a traditional individual retirement account in the U.S.

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The study additionally reveals that:

  • Two-thirds (67 per cent) of Canadians have an RRSP and 39 per cent have a TFSA.
  • The most attractive TFSA benefits cited were that investments are tax-free (36 per cent) and that funds can be withdrawn at any time (20 per cent).

TFSAs allow Canadians to earn tax-free investment income to meet their savings needs. Key benefits of the plan include:

  • No minimum contribution required to open an account
  • Investors pay no income tax on investment returns earned in the account
  • There are no taxes on funds that are withdrawn
  • TFSAs can hold a wide range of investments
  • The Canadian federal government recently raised the annual contribution limit for a TFSA to $5,500 from $5,000

An RRSP, a tax-deferred retirement savings vehicle, includes the following features:

  • Investment growth is tax-free until withdrawn, meaning retirement wealth has the potential to grow faster than if invested outside an RRSP
  • Contributions to an RRSP are typically tax deductible, lowering annual taxable income and income taxes payable
  • RRSPs can hold a wide range of qualified investments
  • Funds can easily transition to retirement income
  • Spouses can split income to reduce their combined taxes payable