A tiered savings account is a type of savings account that allows you to earn higher levels of interest based on your account balance. It can motivate you to put greater sums of money away in order to reach the maximum interest rate.
Several of the big banks offer a tiered savings account, including Scotiabank, CIBC, and BMO. Let’s take a look at how tiered interest in a savings account works, the pros and cons of this type of account, and your best tiered savings account options in Canada.
Key Takeaways
- A tiered savings account offers different interest rates based on account balance.
- These accounts promote savings but may earn less interest than other investments.
- Several big banks offer tiered savings accounts, including CIBC and Scotiabank.
- Lenders use deposits from clients to lend out as credit to other customers.
- To calculate interest, use the formula: Principal * Interest Rate * Term (Years).
How does a tiered savings account work?
A tiered savings account offers an incentive for clients who save a large amount of money. Basically, the higher the account balance, the higher the interest rate offered. This way, customers are encouraged to save more and stay loyal to their financial institution.
For example, the CIBC eAdvantage Savings Account offers:
- 0.25% on balances up to $9,999.99
- 0.85% on balances between $10,000 and $24,999.99
- 1.5% on balances between $25,000 and $99,999.99
- 1.7% on balances between $100,000 and $499,999.99
- And finally, balances over $500,000 will receive 0.9%
Many tiered accounts are structured by account balance, but some are structured by time period or by monthly deposits. In even more rare cases, a savings account rate could be tiered based on a subscription fee you pay, which is the case for KOHO Earn Interest. Here's how this one is broken down:
- Easy (free tier): 2% interest
- Essential ($4 a month): 3.5%
- Extra ($9 a month): 3.5%
- Everything ($19 a month): 3.5%
How to calculate interest on a tiered savings account
The formula to calculate interest is simple:
Interest = Principal * Interest Rate * Term Length (years)
Using the CIBC eAdvantage Savings Account example from above, let’s look at how much interest you would earn at each tier and how to calculate it:
| Account balance | Savings rate | Formula | Interest earned in a year |
|---|---|---|---|
| $9,999 | 0.25% | 9,999 * 0.0065 * 1 | $64.99 |
| $10,000 | 0.85% | 10,000 * 0.0085 * 1 | $85 |
| $25,000 | 1.5% | 25,000 * 0.015 * 1 | $375 |
| $100,000 | 1.7% | 100,000 * 0.017 * 1 | $1,700 |
| $500,000 | 0.9% | 500,000 * 0.019 * 1 | $9,500 |
Note that your tiered rate applies to your entire balance (not just the funds in that tier).
The best tiered savings accounts
Here is a comparison of the best tiered savings accounts available in Canada:
| Tiered savings account | Minimum interest rate | Maximum interest rate | Promotion | Balance required for maximum interest rate | Interested? |
|---|---|---|---|---|---|
| Scotiabank MomentumPLUS Savings Account | 0.55% |
Premium Period Interest Rate: 0.85% to 1.25% Ultimate Interest Rate Boost: 0.1% Welcome Bonus Interest Rate: 4.95% |
Up to 3.4% for 3 months | $0 | Open an account |
| CIBC eAdvantage Savings Account | 0.25% | 0.9% | 5.75% bonus interest rate for the first 4 months | Deposit of $200 a month | Learn more |
| BMO Savings Builder Account | 0.1% | 0.75% | N/A | Deposit of $200 a month | Learn more |
Why lenders offer tiered accounts
The business model for tiered savings accounts is quite simple. The banks entice their customers to have high account balances so they can lend out this money to other customers at a higher interest rate. In turn, clients receive a small profit.
The more funds you keep in your account, the more banks can lend. Offering a higher interest rate on a higher balance encourages customers to park their money and reap the rewards.
4 pros of a tiered savings account
There are numerous benefits to owning one of these accounts.
1. It’s a good way to earn interest on short-term savings
If you aren’t willing to risk losing money in the stock market in the near term, contributing money into a tiered savings account that provides a guaranteed interest rate is a safe alternative.
2. It encourages customers to save more money
To receive the top interest rate, financial institutions are supporting customers to save money every month.
3. Motivates you to work towards your financial goals
Are you working towards an important savings goal? Perhaps it’s for a family vacation or a new car. Receiving interest payments will help you reach your financial goals even faster.
4. Accessible if you need money
Although the intention behind a savings account is to save, you have easy access to your funds if you need to make a withdrawal. Savings accounts are more liquid than other types of assets.
3 cons of a tiered savings account
Here are a few downsides to consider.
1. Earn less interest compared to other financial products
The interest rate you’re earning in a tiered savings account could potentially be less than investing it.
2. Fees for additional transactions
Depending on the account, you may be allowed a few transactions per month. However, if you go above that, then you will be charged extra bank fees.
3. Limited-time promotions
Although it may seem enticing to earn up to 5% interest, it may only be temporary. Be sure to read the fine print of the promotional offers to understand what rules you need to follow to be eligible for any bonus interest rates.
$75 GeniusCash + Unlimited transactions for $0 + Ding-free non-affiliated ATM usage.
$25 GeniusCash + $50 bonus for funding a new account, and $0 commissions on stocks & ETFs
$12 GeniusCash + Access trusted news coverage 24/7 + Digital and home subscription options.
$25 GeniusCash + Delicious meal choices with fresh ingredients + Front-door delivery.Does your bank have tiered savings accounts?
Tiered savings accounts promote saving by increasing the available interest rate based on how much you have in your account. Do you have a tiered savings account with your bank? How do you like it?
Share your experiences with us in the comments below.
FAQ
How do I open a tiered savings account?
Once you’ve decided on a tiered savings account, you can open an account by visiting a branch, calling customer support, or applying online. See the best tiered savings account comparison chart for more details.
How is a tiered saving account different from a regular savings account?
A tiered savings account will offer different levels of interest rates based on the size of your account. A regular savings account will have a fixed interest rate no matter how much money you hold in it.
What’s the best tiered savings account?
If you’re looking for the highest base interest rate, then the Scotiabank MomentumPLUS Savings Account offers a 0.55% interest rate. Be sure to keep checking as financial institutions are constantly offering promotions throughout the year.
Are there any fees for a tiered savings account?
No, there aren't normally monthly fees for a tiered savings account. You may be charged fees for transactions, such as withdrawals or transfers. Transaction fees can be up to $5 each.
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