I use to think that Canadian retirement savings accounts were pretty straight forward compared to those South of our border. That is completely on the surface of course. I have only recently been exposed to the US system when I took on accountability for a team based in the US with a completely different set of benefits compared to my Canadian team. The Canadian team has a defined benefit company pension and optional contributions to group registered retirement savings plan with match up to a certain %. The US team on the other hand is talking about 401ks and IRAs. On the surface, it is like a whole other language but when I started digging in a bit I discovered that retirement savings plans in Canada and the US are very similar in a number of ways:
- A traditional IRA (Individual Retirement Account) is very similar to the Canadian RRSP/RSP (Registered Retirement Savings Plans). Contributions in both cases are tax deductible with investments growing tax free. Withdrawals however will be taxed and required withdrawals kick in at a certain age from these plans.
- A Roth IRA is similar to a Tax Free Savings Account (TFSA) in Canada. Contributions to these accounts are not tax deductible however they do grow tax free and withdrawals are generally not taxed. The US Roth IRA is a bit more complex than the TFSA but they have many of the same advantages.
- A 401k is similar to a group RSP account (or even a defined contribution pension plan) where contributions are deducted before tax from a paycheque and deposited to a retirement savings account often with a match by the employer.
Whether you live in Canada or the US, your options can be overwhelming and personal circumstances can impact where you should invest your next $1. As you are building your plan, it can be really helpful to surround yourself with a strong team that includes an investment professional and tax accountant.
If you are looking for more information on the various retirement savings accounts in Canada and the US, check out some of these resources:
- The IRS’ IRA Comparison Chart
- CNN’s Ultimate Guide to Retirement
- Money Sense: RRSP vs TFSA
- The Globe & Mail’s RSP Primer