Your Complete Guide to Savings Accounts in Canada

Savings accounts in Canada can be a great financial resource if used properly.

The 3 pillars of building wealth are getting out of debt, spending less than you make, and saving for retirement. 

When looking at saving for retirement, a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA) are great tools that enable you to achieve your retirement goals. 

For those looking to save for a child’s education, a Registered Education Savings Plan (RESP) is another great tool that you can leverage.  

But, for short-term savings goals, or to build out a lump sum of money in case of emergency (commonly called an “emergency fund”), a high-interest savings account can be a great resource for you. 

Unless you’ve been living under a rock, it’s safe to assume that you know what a savings account is. However, based on my experience in the personal finance sector, I’ve concluded that the majority of Canadians aren’t leveraging their savings account to their fullest potential. 

For Canadians, understanding when to leverage a high-interest savings account (HISA) is imperative to ensure you’re maximizing your savings. 

Googling “what is the best savings account” will lead you down a personal finance rabbit hole that can be frustrating, and may result in you ditching the entire learning experience altogether. I’ve pulled a few highlights from what I consider to be great source material to help provide the benefits, and the drawbacks of the different savings accounts in the market today. 

In this post, we’ll cover 10 things you need to know about savings accounts in Canada, that will enable you to hit your financial goals. 

Stay up to Date on the Latest Travel Deals

Here are 10 things you need to know about savings accounts here in Canada

1. Understand the Function of a Savings Account

To maximize the value of your savings account, you need to first understand the objective of the account itself. 

Taken from Investopedia: 

A savings account is an interest-bearing deposit account held at a bank or other financial institution. Though these accounts typically pay a modest interest rate, their safety and reliability make them a great option for parking cash you want available for short-term needs. If you’re ready to shop for a new savings account, we maintain a list of the best savings account rates we can find.

Savings accounts have some limitations on how often you can withdraw funds, but generally offer exceptional flexibility that’s ideal for building an emergency fund, saving for a short-term goal like buying a car or going on vacation, or simply sweeping surplus cash you doesn’t need in your checking account so it can earn more interest elsewhere.

Understanding that piece of information, let’s dive into how we can maximize your savings account.

2. Types of Savings Accounts in Canada 

There are several different savings accounts in Canada that you have access to 

Basic Savings Accounts in Canada

Taken from Greedyrates

A basic savings account is one that operates in the standard manner of holding customer funds and paying them small amounts of interest, which will in most circumstances be subject to income tax. Remember that some banks may charge fees for depositing money or moving it from another account, so factor this into your calculations as well.

Tax-Free Savings Accounts in Canada

Taken directly from Wealthsimple  

Though TFSA is an acronym for Tax Free Savings Account, it’s not really much at all like those savings accounts you probably had as a kid. Ones that earned almost no interest but provided access to all-you-can-eat stale lollipops from your local bank branch. Instead, think of a tax-free savings account (TFSA) as a basket. You can pick what to put in that basket from a bevy of financial instruments’ exchange traded funds, guaranteed investment certificates, stocks, bonds and yes, actual cash savings. The Canadian government introduced TFSAs in 2009 as a way to encourage people to save money. Since you paid tax on the money you put into your TFSA, you won’t have to pay anything when you take money out.

How a TFSA works is very simple. You open a TFSA, deposit money and hopefully watch your money grow. One of the greatest features of the TFSA is their flexibility in terms of when you can withdraw your money. Unlike an RRSP, you’re free to withdraw at any time without penalty, but there are government-mandated limits to how much you can contribute every year. The maximum you’re allowed to put into a TFSA each year is known as the contribution limit and it varies from year to year. It’s a good idea to take a gander at this year’s limit and past limits before you open a TFSA and start contributing. That’s because over contributing comes with a nasty little penalty (1% of the excess contribution every month until it’s withdrawn).

A TFSA is what’s often referred to as a “tax-advantaged account” meaning the government provides tax breaks.

High-Interest Savings Account

Taken from Greedyrates

With the advent of digital banking, there are now special accounts that offer a higher rate of return than what you’d receive with a basic savings account. When looking at these high-interest savings accounts (HISAs), be sure to pay close attention to all the fees and stipulations involved, because the higher interest rates offered may be offset by a higher minimum deposit or tighter restrictions on withdrawals.

Registered Education Savings Plan (RESP)

Taken directly from Wealthsimple

Registered Education Savings Plan (RESPs) are pretty simple. They’re regulated accounts to be used for saving money for a child’s post-secondary education. The main benefit of an RESP is its tax-advantaged nature.

RESPs are tax-advantaged accounts designed to help Canadians save for higher education. RESP funds can be invested in countless ways and if they are spent on higher-education related tuition or expenses, no investment gains in the account will be subject to income taxes.

As long as both the account opener and beneficiary are Canadian, it doesn’t matter who opens the account. It could be a child’ parent, grandparent, a friend of the family, or any old benevolent neighborhood creep as long as he’s got access to a kid’s Social Insurance Number. RESPs are nontransferable except to a sibling. A family RESP, however, can be opened only by parents or grandparents of the children and may be spent on the education of any child in the family.

US Dollar 

Taken from Greedyrates

Savings accounts can also exist to hold foreign currency, such as the US dollar. For those who do business in the United States, own property there or need greater access to US financial services, having a USD savings account can help overcome obstacles that exist between the two countries’ banking infrastructures and separate currencies.

Senior Savings Accounts in Canada

Taken from Greedyrates

Canadians who are 60 and older can avail themselves of the country’s selection of Senior savings accounts. These operate in the same manner as regular savings accounts, but will often give special fee exemptions or interest rates to older account holders.

3. High-Interest Savings Accounts vs Traditional Savings Accounts

For those Canadians who are interested in putting their money into a savings account, one decision that will need to be made is whether to put money into a traditional savings account, or a high-interest savings account. 

High-interest savings accounts typically pay a higher interest rate than traditional savings accounts, and also offer lower fees. 

Needless to say, a high-interest savings account makes sense over a traditional savings account. 

4. High-Interest Savings Account vs Other Savings Vehicles

Understanding where a high-interest savings account fits in your personal finance roadmap is very much dependent on the individual.

For those who are currently in the process of building wealth, paying off high-interest debt is important. Spending less than you make is essential to getting off the ground. Putting aside 15% for retirement is also imperative to securing your financial wellness. 

Due to the higher rate of return, a TFSA can be a great vehicle for saving for retirement. A TFSA can also be used for building out short-term opportunity funds. 

But what happens once you’ve maxed out your TFSA? 

For starters, this is a great problem to have. It means you’re well on your way to building wealth. It also means you can now choose from several supplemental investment options that are in the market. 

You can put money into a RESP if you’re interested in building out a college fund for your children. You can also invest your funds in the stock market. However, these options don’t always provide you with a lot of liquidity. You don’t want to pull money out of the stock market during an economic downturn. 

This is where a high-interest savings account can help fill the gaps. It can provide you with additional liquidity, and be built up as a short-term “emergency fund” to help get you through short-term economic downturns. 

A HISA can be built up as an “opportunity fund” to help with large purchases. 

5. Don’t Let Money Sit in Your Chequing Account – Move it (to a Savings Account)

There may be a few instances in your life where you need $1,000-$2,000 cash, and for whatever reason, you cannot leverage your credit card to make that purchase. 

For that reason, having a few thousand dollars in your chequing account as a “24-hour emergency fund” makes sense. 

Aside from that, having your money continuously built up in your chequing account is inexcusable.  

Inflation is roughly 1%/year, and on average you can expect 5% year over year returns from the stock market. All this means that you are losing a great deal of money by having your money in your chequing account. 

Rather than having this stagnant pool of money, you could consider: 

• Paying off debt (even your mortgage)
• Building out an emergency fund with a TFSA or high-interest savings account 
• Putting aside 15% for retirement into an RRSP or TFSA 
• Allocating money to a Registered Education Savings Plan to help financially support your child(ren) through their higher education journey (do this if you’re regularly putting 15% away for retirement)
• Investing the money in the stock market (do this if you’re putting away 15% for retirement, individual stocks shouldn’t be your retirement plan)
• Putting the money in a TFSA to help save for short-term large purchases like a car, or rental property
• Putting money in a high-interest savings account if you are risk-averse

Nowhere on this list is “have money sit and do nothing.”

Your chequing account is best used as a vehicle to transfer money into funds that are going to help you achieve something impactful (like being debt-free or retiring comfortably). 

If you haven’t built up the aforementioned emergency fund, that is a great alternative to a gluttonous chequing account. 

6. Watch the Fees 

There are savings accounts in Canada that charge fees, and for the majority of Canadians, there is little need to leverage a savings account that charges you money. 

If you feel that you’re being overcharged for the services, I would strongly encourage you to check out these savings accounts outlined by Ratehub.com

The type of account you need is very much dependent on your usage patterns.

I strongly encourage you to review the costs and come to your conclusion. 

7. Ditch the Brand Loyalty

I’ve spoken with a few individuals who are under the impression that combining your chequing account with your TFSA & your mortgage with one financial institution will lead to savings across the board. 

While in theory that makes a lot of sense, in actuality, the rebates you’ll receive are negligible. 

It’s best practice to shop around for the best mortgage rates, pick a retirement vehicle that’s right for you (with a provider that’s right for you), and pick a savings account that makes sense for you based on the criteria above. 

You will be able to leverage technology to transfer funds between your different financial institutions to ensure you never miss a payment. 

8. Chequing vs Savings Accounts

Some Canadians have questions as to whether they should keep their funds in a chequing or savings account. 

As we’ve covered, the primary purpose of a chequing account is to provide you a moderate level of liquidity and to be an avenue to funnel money into accounts (TFSA, RRSP, etc) that can provide you with more long-term financial freedom.

A savings account on the other hand is meant to act as a backup to your chequing account. It’s meant to be there if you need a lump sum of cash. A savings account is not meant for daily transactions. Fees are high when using a savings account for this purpose. 

In other words, a savings account is best used as an emergency fund or opportunity fund.  

9. How to Choose a High-Interest Savings Account in Canada

There are a few things you’ll need to consider when choosing a High-Interest Savings Account.

Don’t Be Fooled by Short Term Promotions 

Some HISA’s offer short term promotions that encourage you to sign up for their account. While that may sound great, you want to look at the rate of return once the promotional period is over. 

Minimum Balances 

Some institutions require a minimum balance to reduce/eliminate administrative fees. This is something you want to check. As we’ve mentioned before, fees should be reduced as much as possible with HISAs 

Transaction limits 

Another thing you will need to consider is how often you intend to withdraw money from your HISA. Some banks charge a great deal of money if you go over their transaction limit. 

10. Traditional vs Robo-Advisors

By now, you’ve probably heard about some of the top Robo-Advisors in the market (companies like Questrade or Wealthsimple). 

I’ve taken this clip directly from Investopia to help illustrate the benefit: 

In 2014, Betterment launched the world’s first robo-advisor with the aim of serving ordinary individuals who did not have enough assets to interest a skilled financial advisor, many of whom still require an account minimum of five- to six-figures and who charge 1% or more each year in assets under management (AUM). The solution was to take advantage of advances in both technology and market structure to offer low-cost and effective investing with extremely low opening balances. 

On the technology side, the use of algorithmic trading, mobile apps, and digital signatures meant that the account-opening process no longer required reams of paperwork to be signed and that computers could execute trades without error and monitor portfolios continuously, something that financial advisors could never be able to do for more than a handful of accounts at a time. 

On the market side, low-cost exchange-traded funds (ETFs) emerged as the obvious type of securities to gain broad market exposure to various assets classes, such as stocks, bonds, real estate, commodities, and treasuries. ETFs charge very low management fees(now as low as 0.20%) when the average index mutual fund levies fees of 0.75%) and trade throughout the day like stocks, providing greater transparency and liquidity. Moreover, ETF trading has become commission-free at several brokers and clearing firms. All of this allows robo-advisors to manage client money for just 0.25% annually of AUM (on average), and users can open accounts with as little a $5.

In conclusion a robo-advisor is best for the following individuals 

• Those who are technologically savvy 
• Those looking to save on fees 
• Entry level investors
• Those who use a traditional financial advisor or bank, but do not engage with them on a regular basis

While robo-advisors have traditionally been associated with RRSPs & TFSAs, they are now branching into the chequing and savings space.

Wealthsimple Black is one of the new robo-advisor hybrid chequing+savings  accounts in the market.

Here are a few features of this new product: 

• 0.75% interest for every dollar deposited into the account
• No account fees: Wealthsimple Cash has no account minimums or, maintenance fees
• No minimum deposit period
• Unlimited free transfers. 
• Seamlessly integrated with other Wealthsimple accounts

If you have questions about robo-advisors, or if you feel you may benefit by switching to a technology-based solution, I strongly encourage you to check out Wealthsimple. 

Here is a detailed review of the user experience by Canadian Youtuber Brandon Beavis

Bottom line….check out Wealthsimple 

Conclusion 

A savings account, and particularly a high interest savings account can be a great tool in your financial wellness toolkit. 

For those who need an emergency fund, a HISA can provide you with an amount of liquidity while also earning you a little bit of interest along the way. 

Savings Accounts FAQ

How are Savings Accounts in Canada Taxed? 

Unlike a TFSA, earnings in a High-Interest Savings Account (HISA) are taxed by the federal government. You will receive a T-5 from your financial institution.

4 Tips to help you on your financial wellness journey 

1. Based on the information above, determine if a savings account (particularly a high-interest savings account) is right for you
2. Source the market to determine the provider that best makes sense for you
3. Set up automatic transfers between your chequing account and your high-interest savings account until your emergency fund (~4-6 months of expenses) is built up.
4. Periodically check back on your emergency fund, but do not feel the need to check this regularly. An emergency fund is meant to be a “set it and forget it” piece of your financial wellness portfolio