• Tax-free savings: who’s got the best rate?

    Posted on January 23rd, 2009 Saver Queen 10 comments

    Have you opened your Tax-Free Savings Account yet?

    As I’m sure most of you are already aware, you can now open up a tax-free savings account with any major bank and contribute up to $5000 each year; you never pay tax on the interest you earn.  The TFSA can hold cash, securities, mutual funds, GICs and Bonds.  If you do not contribute your full amount  you can increase your contribution the next year.  So if you can only contribute $2000 this year, next year you can contribute $8000.

    And TFSA’s do not affect eligibility for any kind of federal inc0me-tested benefit.

    Red Flag Deals has plenty of information on the subject, including an article called, ‘TFSA: Take Advantage of a New Tax Haven - Another Way to Add To Retirement Income And Plan for Emergencies” By Bennett Gold LLP, Chartered Accountants.

    They have also provided a nifty comparison chart to see who has the best rate. 

    Although you should do your own research before opening an account, here is a quick summary:

    The Tax-Free Savings Account Winners & Losers

    Best  Second Best rate: PC Financial - 3.05%.  2.55%

    PC has a no-fee account, which means it’s free to open the account or transfer money in or out, with one exception: there is a $50 fee to transfer the money to another institution.  

    Second First place: ING - 3.00%

    It’s is about on par with PC Financial.  They are offering a bonus interest of 13% on your first $100 if you deposit before the end of this month.  This equals $13 - not enough incentive to open an account there, in my opinion, but they have a good rate and no fees - not even a transfer fee. 

    Highest rate: CTFS: - 3.50%

    But this interest rate only lasts until March 30th, at which point the interest rate drops to 2.50%. The comparison chart at Red Flag Deals shows 3.75% until March 30th but this was not consistent with my research.

    Similarly, HSBC is currently offering a rate of 3.50% but this is only until March 16th, at which point the rate also becomes 2.50%  (Once again, the comparison chart at Red Flag showed 3.75%.)

    Since you will be theoretically keeping your tax-free savings in the account over the long-term in order for your compound interest to work its magic, the bonus 1% interest on $5000 or less over the course of a couple of months is pretty meaningless, and will not compare to earning more over a longer period of time.  My humble opinion is to pick the best rate for the institution that is going to meet your needs for the long-term and not to get suckered into initial “bonus interest” specials that are kind of fly-traps for bargain hunters.

     Runner’s Up: CIBC and BMO - 2.50%

    They each have a rate of 3.00% percent.  BMO has no transfer out fee and a $50 minimum; CIBC has a $100 transfer out fee and a $25 minimum.

    The worst: Scotiabank - 1.75% - eeyuk!  RBC and TD have rates at 2.50%.

    Remember that interest rates can change, so it’s important to pick a financial institution that meets your needs for the long-term and not get jerked around by special bonuses.  Look carefully for hidden fees before making a decision. 

    The bottom line is that the TFSA is a great way to save (or invest) your money.  It’s not tax-deductible though, so they will not replace RRSPs.  If you are interested in more ways to reduce your taxes check out some of my earlier posts where I provided tips on how to do so:

    The Top Ten List - number nine has a few strategies on how to save on taxes.

    How to beat student poverty - see tip number 13 for a few ideas of what you can claim.

    Giving back wisely - although the 2008 is over, here are a few ways to tax-efficient ways of giving that you can consider for next year.

    General Tax & Benefit Guide, 2008 - Deductions.  Go straight to the source - here is a list of all deductions you might be eligible to claim from the CRA.

    The Saver Queen

    *UPDATE*  As mentioned by Sally, PC has now dropped to 2.55% making ING the winner. (Thanks, Sally!)

    Taxes
     

    10 responses to “Tax-free savings: who’s got the best rate?”

    1. Sally January 23rd, 2009 at 13:59

      Correction - today’s President’s Choice rate is 2.55% on the TFSA. The rates changed this week. PC keeps getting lower and lower. I haven’t checked the other banks.

    2. Annie January 23rd, 2009 at 14:12

      I’ve got mine tucked in at ING. Their rates fluctuate with the market and at this point, as you say, the extra 1% or so is mostly meaningless. The rates will go back up (eventually) and my $1200 is safe enough for the time being. I got an extra $3 int when it became official in Jan - they had a “special” during December. :P Regardless, I am glad I got one!

    3. Katie January 23rd, 2009 at 14:51

      We are in the process of opening one… thanks for the info

    4. Brandi January 23rd, 2009 at 14:54

      Hey, I’m currently following Dave Ramsey’s debt plan. I am starting to look into money markey accounts for my emergency fund. Do you know a lot about these? Can you point me in a direction? I heard that ING was a good one….

    5. Saver Queen January 23rd, 2009 at 15:14

      Hi Brandi, since I’m in Canada, I don’t know all of the US banks, so I would encourage you to research it yourself, however I will weigh in on what to look for and some things to consider.

      Money Market Accounts typically do offer you better interest rate than regular savings accounts, but before choosing one, be sure to check out all maintenance fees, minimum balances, and interest rates. Some have restrictions on the number of transfers you can make, and they require minimum balances to waive expensive maintenance fees. For example, the Bank of America, although it has unlimited transfers, has $15 monthly fee if you do not maintain a $5000 balance.

      Even if you have enough money now to put that $5000 in the bank, you may need it in the near future - especially if this is your EF. If you need this money in an emergency, be prepared to have to shell out that fee.

      Unless you have gobs of cash, the interest rate probably won’t make a huge difference, especially if you need the money in a few years. Getting a 1% interest rate through a Money Market Account (at the Bank of America) compared to a .2% over the course of a few years on, say, $5000, will not make a big difference. And being young, there will probably be lots of expenses heading your way, so you may need to draw on that money…

      These are just my thoughts. If you find some great money market accounts, please come back to share the results! I’m sure my American readers would be happy to know!

    6. J. Money January 23rd, 2009 at 15:49

      Wowww, i have never heard of that! I wonder if it’s a Canadian thing only? (I’m in the U.S) I kinda hope it is so i don’t feel like an idiot ;) but if not, i’m soooo getting it hooked up.

    7. How to Live in Canada January 23rd, 2009 at 16:34

      I did not open mine yet. I am planning to maximize my RRSP and with the money that I will receive back, I will use to open my TFSA :)

      However, great tips. Thank you.

    8. CanadianSaver January 23rd, 2009 at 20:32

      Mine’s at ING right now… I only opened it with $100 to get the $13 bonus. I will see what I decide with my RRSPs, then move funds around so I can put the whole $5,000 by the end of the year…

      ING’s been so easy to deal with, I went with them because of that, not because of the interest rate.

    9. Saver Queen January 23rd, 2009 at 20:44

      J Money - Canadian only, I’m afraid. Do you have any input for Brandi re: the money market accounts:

      How to Live - Good idea!!!

      Canadian Saver - Glad to hear you like ING. They definitely seem to be the winner. Let’s home the interest rate stays put.

    10. Saver Queen » Blog Archive » How to avoid getting kneed in the package at tax time January 27th, 2009 at 14:38

      [...] Tax-Free Savings: Who’s got the best rate?   [...]

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