Something that I would like to learn more about is how personal finance issues work in the U.S. For example, how do their retirement 401k and roth IRA/traditional IRA systems work? How do they compare to an RRSP and TFSA? How about their mortgages and real estate system?
With the help of The Money Writers, Generation X Finance in particular, I was able to put something together in comparing retirement accounts across the border. This is part 1 of perhaps many posts about the personal finance comparison between the giant neighboring countries.
I think that the best way to represent the comparison is through a table matrix. That way, we can see how their benefits/downfalls compare side by side.
|RRSP||TFSA||401k||Roth IRA||Traditional IRA|
|Contributions Pre Tax?||Yes||No||Yes||No||Yes|
|Contribution Limit||18% of prev yrs earned income. Max $20k for 2008.||$5k / year||$15.5k / yr with $5k extra when > 50 yrs old||$5k with $1k extra > 50 yrs old||$5k with $1k extra > 50 yrs old|
|Withdrawal Age||Anytime||Anytime||>59.5 yrs old or additional 10% tax levied.||Anytime*||>59.5 yrs old or additional 10% tax levied.|
|Mandatory Withdrawal Age||71||None||70.5||70.5||70.5|
|Tax on Withdrawal||Taxed as income||None||Taxed as Income, 10% penalty for early withdrawal.||None*||Taxed as Income, 10% penalty for early withdrawal.|
|Tax Free Growth?||Yes||Yes||Yes||Yes||Yes|
|Option to be self directed in discount brokerage?||Yes||Yes?||No**||Yes||Yes|
* Withdrawals from a Roth IRA have a few stipulations. Contributions can be withdrawn at anytime without any penalties or tax. The growth on the contributions however, must be in the account for at least 5 years AND the account holder must be older than 59.5 yrs in order for the withdrawals to be tax free. They can also be withdrawn for qualifying purchases like first home purchase or disability.
** Generally speaking, you can't place a 401k account under a self directed discount brokerage like E*Trade. However, there are some situations where some of the 401k money can be placed in a self directed account.
By the looks of the table, it seems that our RRSP system is very similar to the 401k, and the TFSA is the same idea as the Roth IRA. The traditional IRA though is a hybrid between an RRSP and TFSA. I may be biased, but it looks to me that Canadian retirement accounts have a slight advantage over our friends south of the border. Their mortgage/real estate tax system however, seems to have a big advantage over Canada. This will be discussed in another article.
Note that this article is the bare bones basics of all the accounts listed above as there were a substantial amount of details that were not included.
Photo credit: PinkMoose