The best Savings Accounts: based on what you’re saving for

By Zack Fenech

Special to the Financial Independence Hub

Saving can be one of the most time-consuming methods of acquiring personal wealth, but if you choose the right account for the right goal, you can make the most out of this lengthy process.

The best way to make your money work over time is by choosing the best savings account based on what you’re saving for.

Picking the best savings account in Canada can maximize your interest return and (in some cases) minimize the amount of taxes you’ll end up having to pay.

How to choose a Savings Account

Generally speaking, there are three main types of savings accounts available: a Registered Retirement Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), and a High-Interest Savings Account (HISA). Considering this, it’s important to establish what exactly it is that you’re saving for, and how much time you’re willing to invest with your money.

While this might seem obvious, it’s a crucial step in the financial planning process. By finding the best savings accounts based on what you’re saving for, you’ll be able to achieve your financial goals much more quickly.

The other side of the coin shows that not choosing the right account can cause roadblocks down the line and sometimes cost you money in early withdrawal fees and taxes.

For example, if your aim is saving on a down payment for your first house, but you have all of your money wrapped up in, let’s say, GICs, you won’t be able to withdraw funds early without a penalty.

But that’s not to say that savings accounts are only propped up for massive investments like homes or your retirement.

Saving up for a car, your wedding, or even a trip can have significant benefits on your interest return, but only if you pick the best savings accounts for your financial goals.

Base choice of Savings Account on what you’re saving for

If you’re unsure what it is you need to save for, consider these two questions before making any firm decisions:

What is my financial situation like right now?
Will I need to access the money I’m investing soon?

Here are a few suggestions why a TFSA, RRSP, and HISA are best suited for your short-term and long-term goals, whatever they may be.

Tax-Free Savings Account (TFSA)

A Tax-Free Savings Account (TFSA) isn’t exactly a savings account. Think of TFSAs as tax shelters. You can put cash, mutual funds, stocks, bonds, or GICs in a TFSA and shelter them from taxes, as long as you remain under your yearly TFSA contribution limit [currently $6,000.]

The contribution limit on your TFSAs depends on how much you contribute each year and the yearly contribution limit allotted by the Canadian Revenue Agency (CRA).

If you exceed your yearly TFSA contribution limit by $2,000, you will not be able to deduct the exceeded amount. Contributions that exceed the $2,000 threshold are subject to a 1% fee for every month the amount remains in your RRSPs.

[Editor’s Note: see reader comment below and refer to this explanation at the Canada.ca website.]

Registered Retirement Savings Plan (RRSP)

A Registered Retirement Savings Plan (RRSP) might seem like a savings account exclusively for retirement planning. However, it’s also one of the best savings accounts for saving for your first home.

An RRSP is somewhat similar to a TFSA. Both shelter your contributions from tax: so long as you remain below your yearly contribution limit. Unlike a TFSA, however, an RRSP does not allow you to withdraw money tax-free.

There are two exceptions of receiving a lower or no taxation on RRSP withdrawal: retirement and purchasing your first home.

Once you retire, you’ll be able to withdraw your RRSPs by converting them into a Registered Retirement Income Fund (RRIF). Once RRSPs become RRIFs, they are no longer considered savings and become your source of income.

Canadians can also use their RRSP savings to put a down payment on their first home. Under Canada’s First Time Home Buyers Plan, Canadian residents can withdraw up to $35,000 from their RRSPs and use those funds as a down payment on their first home, with $70,000 allowed between one couple. The amount that is withdrawn, however, must be contributed back into the RRSP within the next 15 years to avoid penalty.

Like TFSAs, RRSPs also have contribution limits that are different for everybody, meaning taxation rates and contributions can differ widely. Taxation rates on RRSPs generally depend on a person’s yearly income and how much they contribute.

High-Interest Savings Account (HISA)

A High-Interest Savings Account (HISA) is a savings account that offers higher interest on funds deposited into that account, but unlike RRSPs and TFSAs, your funds are not sheltered from tax.

Contributing to a HISA is an excellent way to make a decent return in a shorter amount of time, in comparison to savings plans like RRSPs, for example. Another benefit of a high-interest savings account is the availability of funds, which is why it would make an excellent place to grow your emergency fund. Some high-interest savings accounts offer up to 3% in returns.

Which Savings Account should I choose?

Whether you choose an RRSP, a TFSA, or a HISA, (or maybe even all three), no savings account will work in favour of your savings goals without proper research and planning. Each savings account has advantages and disadvantages, and what those are is entirely subjective to the person using them.

A savings strategy worth its salt is realistic, detailed, and well-executed. Achieving your financial goals is possible, but the likelihood of your success depends mostly on your ability to use a plan that’s suited for your life.

Zack Fenech is an SEO Content Writer for Ratehub.ca, a rate comparison platform that aggregates banking and investing options for Canadians. Ratehub.ca also compares mortgage rates, insurance rates, and credit card rates, with a mission to help Canadians save more money.