Having a savings account with a good interest rate can be an effective way to grow your money and fight against inflation. But with so many options out there, how do you find the best account for your needs? Compare some of the savings accounts below and keep reading to find out how to narrow down your choices, avoid common traps and get the most out your account.
What’s in this guide?
Compare savings accounts
Use a savings account to earn interest and grow your money
The primary feature of a savings account is to safely grow your money over time, so the interest rate offered by the bank determines how little or how much you can earn. An extra 1% yield on an account with a balance of $5,000 will pay out about $50 each year, which is more than you’ll likely pay in fees.
Accumulating savings can be difficult if the Bank of Canada begins to raise interest rates on loans, which could prompt other banks to lower interest rates on savings accounts in order to avoid losing money.
Another obstacle to saving money is inflation, which, simply put, is when prices increase because the amount of money in circulation also increases. If the amount of money in circulation exceeds Canada’s economic growth, then our money loses some of its value. Because of this, it takes more money to buy the same goods and services we were buying before, so prices rise.
When considering a savings account, an important point to look at is the APY (Annual Percentage Yield), which you can use to determine how much you can earn on your savings.
Between 1915-2019, the average rate of inflation in Canada is 3.14%, although it has fluctuated between 1-3% in the last 5 years. This means that your money is expected to lose up 3% of its value each year!
Keeping your funds in a savings account with a high interest rate can lessen the effects of inflation and help protect you financially.
What’s APY and how is it different from APR?
APY or “Annual Percentage Yield,” is the amount of money made each year on an investment due to compound interest. This is also called EAR or “Earned Annual Interest.”
APR or “Annual Percentage Rate,” is the interest rate charged during a certain time period multiplied by the number of time periods in a year. So what does all this mean?
The APY is a higher figure than the APR, because the APY shows you how much interest you’ll earn compounded over an entire year. The APR does not calculate compounding interest, showing you instead how much interest you’ll earn on a monthly basis. (This is assuming that interest is calculated monthly, which you should always verify with your financial institution.)
Banks and financial institutions will often quote the APY when advertising the interest rate for a savings account. This is good to help you see the long-term growth rate of your money. The APR, on the other hand, shows the interest rate stripped down to what you’ll make each compounding period, which will give you a more realistic view of how your money will grow on a month-by-month basis.
Do you have to pay taxes on interest earned from savings accounts?
Yes. As with any income, you’ll have to pay taxes on the interest you earn from funds in your savings account. Each year, your financial institution will give you a return of investment income slip (T5), which you have to submit along with your tax return to the Canada Revenue Agency (CRA).
To avoid paying tax on interest earned on savings, you can look into opening a Tax-Free Savings Account (TFSA), which allows you to grow your money without paying any tax.
There are limits to how much you can deposit into, and withdraw from, a TFSA each year. Speak to a bank representative or a financial advisor to learn more.
Use no-fee savings accounts to protect your money
Fees can rob you of the interest you’d earn in your savings account. Fortunately, you can still get great rates with an account that charges absolutely no monthly, quarterly or annual fees to maintain it.
Below are just some of the Canadian banks that offer no-fee savings accounts. Other options exist including TDePremium Savings Account (0.90% for $10,000 balance), RBC Enhanced Savings Account (tiered interest rate) and CIBC eAdvantage Savings Account (1.05% on balances of $5,000+).*
Tangerine Savings Account1.1% interest rate*
EQ Bank Savings Plus Account 2.30% interest rate*
Scotiabank Momentum Plus Savings Account
1.05% regular interest + premium interest (see below)*
0.75% at 90 days
0.80% at 180 days
0.85% at 270 days
0.90% at 360 days
BMO Smart Savings
0.80% interest rate*
*Information current as of April 20, 2019. Interest is calculated daily on the total closing balance and paid monthly. Rates are yearly and subject to change without notice.
Sometimes the savings accounts with the best rates also have the most hoops to jump through. For example, TD’s High Interest Savings Account will waive transaction fees if your minimum monthly balance is $25,000, and you can only get the high interest rate to begin with if you have at least $5,000 in your account.
TD’s ePremium Savings Account offers an even higher interest rate, but your minimum balance must be at least $10,000. Both accounts scale up your interest rate to a point as your balance grows. CIBC has an eAdvantage Savings Account with an interest rate of 1.05%, but this, too, requires a minimum balance of $5,000.
If you want to grow your savings without putting down a huge sum up front or worrying about maintaining a minimum balance, look for banks that offer savings accounts with no minimum deposit or a low-minimum deposit. Below are just some examples of Canadian banks that offer such accounts.
Tangerine Savings Account
EQ Bank Savings Plus Account
RBC High Interest eSavings Account
TD Every Day Savings Account
How do I find the best savings account for me?
Think about the ways you save money. Do you need regular access to your accounts or do you want to tuck a large chunk of money away for the future? Match your savings style to the points below to help you choose the best savings account type for your situation.
“Set it and forget it” savers.
Some savings accounts are good for low-maintenance savers who are just beginning to save or who simply want to set aside money, perhaps using an automatic payment plan, to let it grow behind the scenes without much effort. If you’re not planning to use your account for aggressive saving, investing or to pay for large expenses, then look for everyday savings accounts with little or no fees and a little leeway to withdraw once in a while, should the need arise, without penalty.
Certain accounts, like Tax-Free Savings Accounts (TFSAs) can give you a great way to build wealth without losing money to taxes and typical account fees. Many different types of investment vehicles can exist within a TFSA such as registered and unregistered Retirement Savings Plans (RSPs and RRSPs), mutual funds and Guaranteed Investment Certificates (GICs).
The amount of money you can contribute and withdraw from your TFSAs each year is limited, however, it’s usually an excellent idea to make such accounts a component of any Canadian wealth-building portfolio.
Dedicated savers looking for a high rate of return.
If you’re intentional about growing your money and have reliable, well-established saving habits, then you may be able to handle an account that requires a minimum balance or has certain restrictions, but offers a higher interest rate than average in return. These accounts are good for savers who are going to make deposits frequently but will rarely make withdrawals.
Banks typically offer savings options specifically for business owners. This is especially useful for self-employed people and contractors who don’t have an employer contributing to their financial safety net in the form of retirement funds, vacation pay, maternity/paternity leave and absences due to sickness or disability.
Business savings accounts are also good for allowing records of business-related cash flow to remain separate from records of personal cash flow, which can be necessary for tax purposes and audits.
Saving for unexpected events and “extras.”
If you have other long-term savings vehicles already in place, you might be looking to open an account simply to cover short-term expenses, occasional financial pitfalls and/or large, one-off expenses (such as home renovations or car purchases).
In that case, you might want to look into savings accounts that allow you to move money in and out easily without being charged fees or penalties.
Having such an account at the same financial institution as the chequing account you use for regular living is convenient as it’ll make moving your money around much easier (especially if online banking is an option).
What are the biggest benefits of savings accounts?
There are so many savings options out there, it can be hard to determine how to pick the best for your savings style. Here are the benefits to look for:
- A $0 minimum deposit. With some savings accounts, you can open the account with a low, or even no, initial deposit. Some accounts don’t require a minimum monthly balance requirement to earn interest or avoid fees.
- No monthly fees. Thanks to competition, you’ll find that many banks waive monthly maintenance or account-keeping fees.
- Set it and forget it. Savings accounts allow you to grow your money without thinking about it. You can make one large deposit and let it earn interest, or schedule payments into your account to help it grow.
- Transfer funds. With the growing popularity of mobile and internet banking, look for banks that let you easily transfer money between your savings and other bank accounts.
- Protect other accounts. A savings account can be used to protect yourself against occasional shortfalls of money. If you have a bill payment or time-sensitive expense coming out of your chequing account but don’t quite have the money to cover it, having funds set aside in a savings account can make it easy to cover the gap. Of course, the trick is to remember to top up your savings again to avoid draining your account.
What are the biggest drawbacks of savings accounts?
Savings accounts are a great place to start growing your money, but there are also other ways to make your money work even harder for you. Consider these drawbacks:
- Limited accessibility. Banks often limits the amount of activity you can have in your savings account, and you may not be able to access certain savings accounts with a debit or ATM card.
- Minimal return on investment. Savings account interest rates often hover around the rate of inflation. To earn a better return on your money, look beyond savings accounts.
Is a joint savings account right for me?
Joint accounts are a great way to reach collective financial goals. Generally, joint accounts allow up to two account holders, but some providers allow for even more. Before opening a joint savings account, consider if it’s right for your financial situation.
Pros of joint savings accounts
- See lower fees and more interest with a high balance.
- Less legal complications if a partner dies.
- Easier to manage household budgeting and long-term goals.
- Creates accountability between you both.
- Easier to reach higher minimum deposits for bigger savings.
Cons of joint savings accounts
- Have less financial independence.
- Could create communication issues regarding spending.
- Creates complications in the event of a separation or divorce.
- Tough to divide funds for individual costs like a car accident or an expensive hobby.
Beyond savings accounts
When interest rates are low, where can you get the best return for your money? If the best high-interest savings accounts aren’t enough or don’t fit your financial goals, there are other ways of getting the most out of your money.
Consider these other ways to save:
Whole life insurance.
If you want to save up for a major purchase or save for retirement, you can put your money into the cash value portion of a whole life insurance policy (sometimes called “universal life insurance” or “participating life insurance”). Universal life insurance policies have a dual benefit, providing cash in the event of your death and an investment vehicle in which to grow your money.
Unlike most insurance policies, a portion of the payments you put towards a whole life insurance policy is put into a tax-advantaged investment scheme, which is chosen based on your needs and risk tolerance. If you need access to cash, you can withdraw it from the investment, borrow against your policy, surrender the policy or even sell it.
Health savings account.
If you want to save up specifically for medical expenses, then a health savings account may be right for you. Using a health savings account, business owners agree to set aside funds for their employees’ medical expenses up to a certain amount. When medical needs arise, employees pay for them and are then completely reimbursed by their employer. The advantage is that these payouts are 100% tax deductible for business owners and 100% tax free for their employees!
This is what makes health savings accounts especially good for self-employed people and contract workers. They can deduct their contributions to these accounts from their business taxes but also receive funds from these accounts – tax free – to cover their medical expenses.
Bear in mind that, to open a health savings account, you’ll need a high-deductible health insurance policy, and you’ll also have to pay a penalty if you spend the money on anything unrelated to medical expenses.
Registered Education Savings Plans (RESPs).
RESPs provide tax advantages for money saved up for future education expenses. As you put aside money into these plans, the Canadian government will also contribute in the form of grants or bonds, and your provincial government may contribute as well. Deposits into these plans are still taxed, but they can grow tax free and be withdrawn from the plan tax free at any time for any reason. Beneficiaries can withdraw funds when they enrol in college, university or any other qualifying program.
Bonds or other investments.
If you’re interested in higher rates of return and are willing to accept more risk, you could consider investing in government or corporate bonds. There are no guarantees with bonds, but they’re less volatile than stocks, mutual funds and exchange traded funds (ETFs).
Either the government or company whose bonds you buy pays them back with interest or it’ll default on them. Historically, however, the likelihood that the government will defaults on bonds is pretty unlikely, and as for corporate bonds, it’s up to you to do your research and buy from a resonably stable company that’ll still being around when you cash in on your investment.
Traps to avoid
The CDIC (Canadian Deposit Insurance Corporation) was designed to promote financial stability in Canada by insuring the money held in bank accounts at qualifying financial institutions. While the deposits in your bank account are likely insured for up to $100,000 in the event of a bank failure, you should also keep an eye out for these risks:
Not meeting the minimum balance of your savings account
If you don’t meet your monthly minimum deposit, you might be hit with fees. If you’re unsure if you can meet the minimum deposits, find a bank account with no such required minimum such as the ones discussed above.
Losing your funds due to a bank failure
Normally, shareholders are affected first, followed by the bonds issued by the banks. Deposits that are guaranteed by the CDIC won’t be affected. In the case of a bank failure, eligible deposits are insured for up to $100,000 per person, per institution.
Being lured in by attractive promotional interest rates
Many institutions have special offers or promotions as an incentive to bank with them, usually higher introductory interest rates for a set period of time. Keep in mind that introductory rates won’t last forever, so while you might get a great rate for the first few months, it will likely revert to a lower rate at the end of the introductory period.
Going over your transaction limits and transfer limits
Banks may limit the number of withdrawals or transactions your can perform for free with your savings account to encourage you to save. After this, you will have to pay a fee for each transaction. You should check with your bank to find out exactly what types of account activity counts towards your limit, but “transactions” typically include cash withdrawals, online payments and transfers. To avoid going over your limit, don’t depend on the funds in your savings account to pay bills or support everyday living expenses. If you need to make multiple withdrawals, try adding together the amount you need and withdrawing it at once to avoid making multiple transactions.
Losing money to variable interest rates
Banks often adjust interest rates based on the prime interest rate set by the Bank of Canada, which is based on the health of the Canadian economy. If your account has a variable interest rate, then it will fluctuate with the prime rate and you may lose out if the Bank of Canada’s rate drops. If the interest rate on your account drops and you’re not sure why, check what the prime rate is or contact your financial institution.
How do I open a savings account?
In most cases, you can apply and open a savings account online as long as you provide 2 pieces of identification and proof of residency (such as utility bill, phone bill or credit card statement with your name and address on it). If you’re a new customer, you’ll need to verify your identity for legal purposes, and you may have to physically go into a branch to do so.
You can open a savings account even if you’ve been bankrupt, don’t have a job, or have nothing to deposit right away (unless the account requires a minimum balance).
At least one, but preferably both, pieces of ID should have your photo on it to prevent being rejected as insufficient. (Note: additional regulations apply – see www.canada.ca for details). The following pieces of ID are acceptable:
- Current foreign passport
- Driver’s license
- Canadian birth certificate
- Canadian Old Age Security card
- Debit card, bank card or Canadian credit card with your name and signature on it
- Canadian Social Insurance Number (SIN) card
- Employee ID card that has been issued by a well-known employer in your area and that has your picture on it
- Certificate of Indian Status
- Permanent resident card
- Provincial or territorial health insurance card if allowed to be used as ID under provincial or territorial law (not all provinces allow health cards to act as proof of ID)
Note that if you’re opening an account that will accrue taxable interest (such as a savings account or an RRSP), you must provide your Social Insurance Number (SIN).
How to open a youth savings account
Youth savings accounts come with some nice perks to encourage younger members of the community to begin handling their money responsibly.
For one, youth savings accounts often charge little to no fees and often come with both unlimited transactions and unlimited cheques.
Different banks across Canada may set different ages under which a minor qualifies to open a youth savings account, but it’s usually between 17-19 years old. To open one of these accounts, the minor will need to be accompanied by a parent or guardian who will open the account for them (and who should also bring their ID according to the list above).
Once the minor reaches the age limit, their youth savings account will automatically convert into an adult savings account. Be sure to research the details of the default savings account your child’s youth account will convert to, as you may find it more beneficial to convert to a different type of savings account with a higher interest rate or maybe greater flexibility to move money between accounts.
How to get the most out of your savings account
- Make sure you keep a minimum balance. Some accounts may require you to hold a minimum balance from month to month, otherwise, you may be hit with fees. Find out if your account requires a minimum balance and make sure you keep your account above that amount.
- Monitor account activity. You should always monitor account activity to stay on top of any unexpected charges or fees. Most banks and financial institutions have apps that allow you to review activity on your savings account from your computer or mobile phone.
- Think about investing. After your savings account has grown, you may want to consider other types of investments. Savings bonds and Guaranteed Investment Certificates (GICs) can provide better returns than standard savings accounts, whereas mutual funds, stocks, real estate and other investments can potentially offer even greater rewards, albeit with greater risk.
- Limit your transactions. Keeping your transactions within your maximum allotment is not only good for avoiding extra transaction fees (which usually range from $0.50 up to several dollars per transaction), but it’s also good for helping you to preserve your savings. Less activity means less spending and more growth.
- Keep an eye out once the introductory rate expires. Most special offers and introductory interest rates aren’t permanent, meaning your interest drops to a lower rate after the introductory period ends. Decide whether your new rate is enough or if it’s worth shopping around for other savings accounts that offer higher introductory interest rates or better long-term rates.
How did we choose these accounts?
Our lists of best savings accounts are ordered by specific features. We considered factors like annual percentage yield (APY), monthly fee, minimum deposit to open the account, minimum balance to earn interest and signup bonuses.