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Everything You Need to Know About Savings Accounts In Canada?

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Last updated on May 6, 2019 Views: 547 Comments: 0

Most of us have had a savings account at some point in our lives to put money away for a vacation, large purchase, wedding or other celebration, and other short-term goals. But how exactly do savings accounts differ from chequing accounts, what purpose do they serve, and which type of savings accounts in Canada are best? This overview will give you all the information you need to choose the right savings account to meet your needs.

What Is a Savings Account?

A savings account is a type of account that you open at a bank, credit union or other financial institution. It is intended to house money that you do not expect to use in the immediate future and on which you’d like to earn a favourable rate of interest.

Unlike chequing accounts, which are meant for day-to-day use including frequent withdrawals, transfers, bill payments, and other banking needs, savings accounts tend to limit those transactions. In exchange, banks are prepared to pay out more interest on a savings account than on a chequing account, because they want to encourage you to leave your deposits with them for as long as possible. This allows financial institutions to fund their other services, such as providing loans and mortgages.

What Is the Purpose of a Savings Account?

A savings account is meant for money you want to sock away for a specific goal in the near future. Instead of putting that money into a chequing account, which likely pays little to no interest, a savings account earns a small rate of interest that will help you reach your goal more quickly.

Similarly, while investments are a good option for long-term savings since they have the potential for higher earnings (which will ensure inflation does not erode the purchasing power of your money over time), most investments are not well-suited to short-term savings. That’s because you may have to pay a penalty to liquidate an investment early, and you are also at the mercy of market fluctuations. If the value of your investment goes down right before you need to access those savings, you could end up selling at a loss.

In other words, savings accounts are in the Goldilocks Zone of income-generating financial products. They don’t pay too little (like a chequing account), but they also don’t carry too much risk (like other types of investments).

Just don’t forget that a savings account is indeed meant for savings, not for daily banking. If your intention is to treat your savings account like a chequing account that pays a better rate of interest, you may end up shelling out more in fees than you earn in interest—depending on the account you choose.

What Types of Savings Accounts Exist in Canada?

There are several kinds of savings accounts available to Canadians of various ages and lifestyles:

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Basic savings accounts. As previously mentioned, such accounts pay more interest than chequing accounts, but usually not much more. Plus, you lose out on a chequing account’s flexibility, as repeatedly moving money in and out of a savings account can result in hefty transaction fees.

High-interest savings accounts. High-interest savings accounts are ideal for those who want to get a better rate of interest on their money than offered by a standard savings account, without locking in to a long-term investment. Some high-interest savings accounts may not have monthly fees or very many transaction fees, although they may have minimum balance requirements or other conditions, so be sure to check the fine print.

Tax-free savings accounts (TFSAs). All income, including income that your money earns in the form of interest, is subject to annual income tax—unless your money is in a tax-sheltered account. A TFSA is one of these registered tax shelters, open to anyone 18 or older. You never pay tax on the income earned in a TFSA, and you can withdraw funds from the account at any time, tax-free. There are restrictions on how much you can deposit each year, but unused contribution room carries forward indefinitely. This year’s annual TFSA contribution limit is $6,000, up from $5,500 last year. Canadians who were at least 18 years of age in 2009, when the TFSA first came into effect, now have a cumulative maximum of $63,500 in TFSA contribution room.

Youth savings accounts. Limited to Canadians age 18 or younger, these accounts usually come with little to no fees. They are ideal for youngsters and students who are dipping their toes into the world of banking, as they won’t be penalized for making an extra withdrawal here and there, or if their balance drops too low. On the flip side, however, youth savings accounts do not typically pay a very good rate of interest. Parents or other adults can open a youth account for the child, and there are often financial literacy materials and tools available for the child to use.

US dollar savings accounts. As the name suggests, this type of account is for US currency only. It can be a good option for those who travel, do business or own property in the United States, and want to keep a stash of US dollars on hand while also earning some interest.

Senior savings accounts. These accounts can be a good option for Canadians age 60 or older, as they may come with lower fees and special rates of interest. Of course, seniors should always compare offers with other high-interest savings accounts to see what works best for them.

Top Savings Accounts in Canada

 Premium Interest RateRegular Interest RateTax-Free InterestTransaction Fees
Scotiabank Momentum PLUS Savings Accountup to 1.95% (if you don’t make any withdrawals within the premium period)1.05%no$5.00
Tangerine Savings, TFSA or RRSP Account
2.75%
(for first 6 months; new clients only)
1.20%yes (TFSA only)$0
(e-transfers $1.00)
EQ Bank Savings Plus Account2.30%2.30%no$0
Motus TFSA Savings Account2.50%2.50%yes$0
(e-transfers $1.25)
Alterna TFSA eSavings Account2.35%2.35%yes$0
(e-transfers $0.95)

Who Should Get a Savings Account and Why?

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Anyone who wants their extra money to earn a decent rate of interest in the short term should consider opening a savings account. Here’s why:

  • Better rate of interest than a chequing account. Most banks pay no interest or a fraction of a percent on chequing accounts, while there are a number of savings accounts in Canada currently offering more than 2% interest.
  • No investment risk. You can’t lose your principal investment because deposits (up to $100,000) are insured by the Canada Deposit Insurance Corp. (CDIC)
  • Your money is not locked in. You don’t have to wait until the end of a specified period to withdraw your funds, as is the case with GICs and many other investments.
  • You will achieve your savings goals more quickly. Research shows you are less likely to spend money that is specifically and separately allocated as savings.

How Are Savings Accounts Taxed?

As previously mentioned, Canadians must pay income tax on savings account earnings—unless the account is in a registered tax shelter, such as a TFSA. Financial institutions send you a T-5 slip (Statement of Investment Income) that specifies how much income your savings account deposits earned during the year, and you must declare that full amount on your annual tax return (there’s a separate line item for it).

Other forms of investment income are more tax efficient, as only a portion of the earnings is added to your taxable income. For example, only 50% of a capital gain (the increase in value on an investment between the time you bought and sold it) is taxable.

Final Word

Savings accounts are an important interest-bearing tool that should be a part of your total cache of financial products. When used properly for short-term savings—and with the right account for your needs—they will help you will reach your savings goals.

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