What are the advantages of using a high-interest savings account?
Have you heard the phrase “Make your money work for you”? This is precisely what high-interest savings accounts are designed to do.
The main advantage is right in the name – a high rate of interest earned on the money in your savings account. That means you get more money just for keeping your money in there! But there are some other aspects of high-interest savings accounts to consider, especially regarding taxes.
Here’s a helpful breakdown of what a high-interest savings account can do for you, and how it measures up to other savings accounts.
How do high-interest and traditional savings accounts compare?
High-interest savings accounts offer more interest on your balance than regular savings accounts – how much more will depend on the combination of features. For instance, some high-interest accounts offer an above-average interest rate, but you’ll have to keep a minimum balance. Others might give you a more moderate interest rate, but with fewer limitations. There’s no right or wrong choice; what works best for you will depend on your priorities.
High-interest savings accounts and traditional savings accounts do have some things in common, like:
Interest rate. Both accounts reward you with interest paid on the balance of your account. But while high-interest savings accounts can earn you over 1%, the interest rate on other savings accounts generally won’t go that high.
Tax on interest. When you earn money, you pay tax – that’s a fact of life. The interest you make on the money in your savings account is no different than your other income, and it will be taxed at the same rate. If you want to reduce the amount of tax you owe, you might want to consider other investment options.
Insurance. You can rest easy knowing that your savings are safe and secure while they’re parked in a savings account. The Canada Deposit Insurance Corporation (CDIC) protects savings accounts opened with major banks, and coverage is free and automatic.
Availability. The longer you leave your money in savings, the greater the reward, but your money is there for you if you need it. Whether it’s a regular or high-interest savings account, you can withdraw money on your schedule (although you may have a limited number of free transactions each month, so keep that in mind).
Take your savings plan to the next level
High interest rates can certainly help you reach your savings goals sooner, and while a high-interest savings account balances security with good returns, it isn’t your only option.
Just as it’s a good idea to diversify your investments, consider spreading your savings around. Canadians have access to some great tax-sheltered savings plans, savings accounts and investment products. Here are a few popular choices that you can combine to build your personalized saving strategy:
Tax-Free Savings Accounts (TFSAs)
Introduced in 2009, the Tax-Free Savings Account (TFSA) is not a traditional savings account: It can hold different investments (but also cash) and comes with contribution and withdrawal limits, but the interest you earn isn’t taxed.
TFSAs are very versatile – aside from regular cash deposits, they can hold:
The flipside is that any market-linked investments are vulnerable to the gains and losses of the stock market. So, while there’s the potential to make more interest, there’s also the chance that your TFSA balance could fall if you’ve invested in things like mutual funds or ETFs.
In the end, it’s up to you – you can decide how to invest your TFSA savings based on your risk tolerance. Not sure how much risk you’re willing to take with your money? A financial planning expert can help you get started!
Registered Retirement Savings Plan (RRSPs)
A Registered Retirement Savings Plan (RRSP) is an account designed for retirement savings. Like a TFSA, an RRSP comes with a yearly contribution limit and it offers a tax break on your yearly income (the exact amount of tax saved will depend on the amount you contribute each year).
Unlike a TFSA, RRSP withdrawals are taxable, so it’s a great idea to couple your RRSP with an account that gives you easier access to your money – especially if you think you may need to use some savings before you retire.
Guaranteed Investment Certificates (GICs)
Guaranteed Investment Certificates (GICs) are low-risk investments that are locked in for a given term – often one or two years, but up to five years (or as low as 30 days). Interest in these accounts is generally taxable, unless the GIC is held in a TFSA.
GICs are a good middle ground if you’d like to earn interest on your savings, but would rather know exactly how much you’ll wind up with instead of rolling the dice. A GIC is also helpful for shorter term goals, like saving up an annual lump sum of money to help pay your mortgage faster.
Bringing it all together
Thanks to the power of compound interest, a high-interest savings account is a great option for short and long-term savings, but it’s only one part of a strong saving strategy. When you couple a high-interest savings account with investments that can reduce the amount of tax you owe, you may be surprised at how quickly your money grows.
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