While the standard savings account is a popular option, other types of savings accounts could be more aligned with your financial goals. From high interest savings accounts to specialty accounts with unique perks, understanding your options is key to growing your savings.
In this article, we’ll explore several types of savings accounts, including:
- Standard savings accounts
- High interest savings accounts (HISA)
- Tiered savings accounts
- Registered savings accounts
- US dollar savings accounts
- Specialty savings accounts
- Money market funds
How are they different? Let's dive in and compare.
Key Takeaways
- Savings accounts come in many flavours, from high interest to USD accounts.
- Tiered savings accounts incentivize saving by giving you a higher interest rate if you have a higher account balance.
- Registered savings plans are tax-advantaged accounts that help clients save for certain goals, such as retirement.
- A money market fund is a relatively low risk mutual fund investment.
Overview of different types of savings accounts
This chart compares each type of savings account to help you decide which is best suited to meet your goals.
| Type of savings account | Pros | Cons | Best for |
|---|---|---|---|
| Standard savings account | * Simple, no-fuss account. * Easy transfers to/from chequing. | * Lower interest than a HISA. | * Simple savings fund to accompany chequing account. |
| High-interest savings account (HISA) | * Earns more interest than standard savings accounts. | * Less perks - they don’t usually come with a debit card, sometimes charge a fee for e-transfers, and have slower transfer times. | * An emergency fund or event-specific savings (i.e., wedding, down payment on a house). |
| Tax-Free Savings Account (TFSA) | * Contributions and income earned are tax-free. | * Very few provide the same benefits as a HISA. * Have contribution limits. | * Anyone age 18 or older with money to set aside for medium to long term savings. |
| Tiered savings account | * The interest rate earned increases according to your account balance. | * You need to keep a large balance sitting untouched to earn the highest interest rate available. | * Could be an alternative to a HISA if the amount you have to save will earn a higher interest rate. |
| Registered Retirement Savings Plan (RRSP) | * Contributions are tax deductible and your investments will grow tax-sheltered until withdrawal. * Taxes aren't paid until withdrawal. | * Premature withdrawals are complicated and may come with penalties. * Have contribution limits. | * Built for long-term retirement savings. |
| U.S. Savings Account | * Pay bills, access funds, transfer money – all in USD * Lower currency conversion fees | * Not useful for those who deal in CAD only | * People who travel or do business in the US |
| Specialty savings account | * Save for specific goals | * Limited to a single purpose | * Those who have specific savings goals |
| Money market fund | * Low-risk, short-term investment | * Low returns * Fees | * People who want diversification |
1. Standard savings account
A standard or traditional savings account is your basic account used for saving money. It’s a straightforward holding account where you deposit your funds, accumulate interest, and keep your money there until you’re ready to spend it or transfer it to another account. It could also be used as an emergency fund.
Let’s look at the highlights and lowlights of this type of account:
| Pros | Cons |
|---|---|
|
|
2. High interest savings account
High interest savings accounts (HISA) and standard savings accounts both earn interest on your account balance, but there's one key difference that sets them apart. HISAs earn higher interest rates than standard savings accounts, allowing you to reach your savings goals more quickly.
The catch is that in return for paying higher interest, HISAs generally have fewer perks. Here are the pros and cons of HISAs:
| Pros | Cons |
|---|---|
|
|
For example, the Motive Savvy Savings Account currently offers 2% interest, no annual fees or minimum balance, and 2 free transactions.
In comparison to the 0.05% TD Bank offers on their TD High Interest Savings Account account, Motive’s offer sounds like a pretty sweet deal.
3. Tiered savings account
Rather than the flat rate offered by standard savings accounts, the interest rate of a tiered savings account is determined on the account balance.
As the balance increases, so will the interest rate you earn.
Take the CIBC eAdvantage Savings Account, for example. The minimum interest an account holder can earn is 0.25%. This applied to balances between $0 and $9,999.99.
But diligent savers can earn even more – balances between $10,000 and $24,999.99 earn a higher rate, as do balances between $25,000 and $99,999.99. It goes up again for balances between $100,000 to $499,999.99. The max rate of 0.9% is awarded to anyone with a balance of $500,000 or more.
Essentially, the CIBC eAdvantage Savings Account uses a tiered interest system that rewards those who are determined to save as much as possible.
Here are some pros and cons of tiered accounts:
| Pros | Cons |
|---|---|
|
|
4. Registered savings account
Registered savings accounts, like the TFSA and RRSP, are accounts that must be registered with the Canada Revenue Agency since they provide tax advantages and have contribution limits.
- Tax-Free Savings Account (TFSA): Contributions and income earned under your TFSA are tax-free for life.
- Registered Retirement Savings Plan (RRSP): You will receive a tax deduction on contributions and your investments will grow tax-sheltered. But you must pay tax on withdrawals.
Unlike with HISAs or tiered savings accounts, your job is not done once money is transferred into a registered savings account. Generally, it must then be invested into an asset, such as a stock, ETF, or mutual fund.
If you want the tax-free benefit of a TFSA with the security and high-interest of a HISA, some institutions are combining the 2 with products like the EQ Bank TFSA Savings Account.
Alternatively, you could purchase a Guaranteed Investment Certificate (GIC) inside your TFSA or RRSP. But keep in mind that GICs have a fixed interest rate for a fixed amount of time, so you’ll pay a penalty if you pull your money out before that time is up.
Here are the pros and cons of a registered account:
| Pros | Cons |
|---|---|
|
|
5. U.S. dollar savings account
A U.S. dollar savings account is made for those who regularly travel to the United States or do business there, or frequently transact in US dollars.
The benefits are pretty cool – it allows you to hold U.S. funds in your Canadian bank account, transfer U.S. money in and out of the account, withdraw money in the States, and avoid the high foreign transaction costs.
It's also worth noting that some chequing accounts allow you to open a U.S. dollar account for free. For instance, the Scotiabank Preferred Package offers this perk, waving the monthly fee for account holders who also open a Scotiabank U.S. Dollar Daily Interest Account. Especially if you already have the Scotiabank Preferred Package, this can be a win-win situation.
Here’s the breakdown of the benefits and downsides of having a U.S. dollar account:
| Pros | Cons |
|---|---|
|
|
$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.6. Specialty savings account
A specialty savings account is a type of account that has a specific purpose or helps its holder reach a savings goal. Examples of this would be the First Home Savings Account (FHSA), where you can save for the purchase of your first home, or a kids’ or seniors' bank account designed for their use.
Here are some pros and cons of specialty accounts:
| Pros | Cons |
|---|---|
|
|
7. Money market funds
A money market fund is a type of short-term mutual fund investment. It’s meant to keep your money liquid and offer portfolio diversification. Money market funds invest in high quality securities, usually government-related holdings – resulting in a lower risk investment.
Here’s some of the upsides and downsides to money market funds:
| Pros | Cons |
|---|---|
|
|
Tax implications of savings accounts
When choosing a savings account in Canada, it’s important to understand the tax implications of the interest you earn. While savings accounts offer a safe way to grow your money, the interest generated is usually taxable. Here’s where you need to know.
Taxable Interest Income
In Canada, interest earned from most savings accounts is taxable by the Canada Revenue Agency. This means that interest is added to your income and will be taxed based on your marginal tax rate.
For example, if you earn $200 in interest from your savings account, this $200 is added to your total annual income and taxed at the applicable rate.
Most banks will provide you with a T5 slip for interest earned over $50 in a calendar year, which you will need when you file your tax return.
This also applies to USD savings accounts. The interest earned is also subject to Canadian tax if you have one. However, while the interest itself is taxable, fluctuations in the value of the U.S. dollar can affect the amount you earn and its eventual tax treatment. Keep this in mind during tax season, as you will need to report your interest in Canadian dollars.
The savings account that’s best for you
When selecting the best savings account, finding one that aligns with your specific financial goals and circumstances is key. No two savers are alike, so it’s important to consider your unique needs before deciding. Here are a few questions to help guide your choice:
- Do you need quick and easy access to your funds? A standard savings account or money market fund might be the best option.
- How long do you plan to save? For short-term goals, a regular savings account may suffice, but for long-term savings, a high-interest or tiered savings account could help you maximize your growth.
- How frequently will you be making withdrawals or transactions? A savings account with fewer withdrawal restrictions might be ideal if you need to make regular transactions.
- Are you looking to hold US dollars? A USD savings account might be necessary if you have international financial needs.
At the end of the day, choosing a savings account is a personal decision that can set the foundation for your financial future. Whether building an emergency fund or saving for a specific goal, the right account can help you achieve more.
FAQ
What are the different types of savings accounts?
Besides a standard savings account, there are 6 different types of savings accounts, including high-interest savings account (HISA), tiered savings accounts, registered savings accounts, US dollar savings accounts, specialty savings accounts, and money market funds.
What is the difference between registered and non-registered savings accounts?
The difference between registered and non-registered accounts is quite simple: a registered savings account is an account that is registered with the Canada Revenue Agency (CRA) and receives tax advantages, but non-registered accounts are not registered with the CRA.
What savings account pays the most interest?
Currently, the Motive Savvy Savings Account earns an impressive 2% interest rate, and the KOHO Earn Interest can go as high as 3.5%. You can learn more details about high interest savings account right here.
Leave a comment
Comments