Tax-Free Savings Accounts: Do They Exist in the United States?

Tax-free savings accounts are a highly effective tool for anyone looking to achieve their short-term and long-term financial objectives. These accounts are beneficial because all income earned from them is tax-free. Unlike RRSPs, contributions made to these accounts do not qualify for tax refunds, but they do grow much faster due to the compounding process. Additionally, tax-free savings accounts are federally insured, ensuring that your money is protected up to $250,000 in the event of bank failure.

Financial institutions, credit unions, trust companies, and insurance companies can issue different types of tax-free savings accounts. There are two main types- regular TFSA accounts, which restrict investment options to those only offered by the bank, and self-directed TFSA accounts, which offer increased investment opportunities in all qualified investment options, such as publicly traded shares, bonds, and small business corporation shares.

Anyone can benefit from opening a tax-free savings account, regardless of income level. The accounts cater to young adults with special projects, those seeking an alternative tax-sheltered savings vehicle after reaching RRSP contribution limits, and retirees who don't need all of their retirement income. As of 2020, the maximum contribution limit for TFSA accounts is ,000. If you've been eligible since TFSA's 2009 introduction and have yet to contribute, your cumulative contribution room will have increased to ,500 in 2020.

A significant benefit of tax-free savings accounts is that they offer a wide range of investment options, including mutual funds, GICs, stocks, bonds, and cash. Another advantage is that any withdrawals made in a calendar year create additional contribution room for the following year. Additionally, funds withdrawn from the account can be re-contributed later without reducing contribution room.

To open a tax-free savings account, you'll need to provide your financial institution, insurance company, or credit union with personal details, including your date of birth and social insurance number. There are many advantages to TFSA accounts, such as the ability to transfer tax-free assets to your spouse upon death. However, note that while U.S. company dividends received in your TFSA are subject to a 15% withholding tax, Canadian retirement accounts offer more generous tax benefits than their American counterparts.