No doubt an advertisement for a high interest savings account (HISA) has crossed your path in the last few months. As of July 23, 2019 I’ve seen banks offering between 2.3% (EQ Bank) and 2.8% (Motive Financial) in interest, which to those earning a measly 1% or less, is a great deal. And while HISAs do have an important role to play in your financial plan, it’s also important to consider when a TFSA would be a better option and/or when to hold your HISA within a TFSA. Yes, you can do that.
The guaranteed interest earned from a HISA, deposited into our account each month is certainly satisfying. But consider that at the end of the year, you’ll receive a T5 slip from the CRA, charging you tax on the interest you earned, since it is considered taxable income. So, when you see the total interest each month, reduce it by the percentage of taxes you pay, for the real number.
If your money had been in a TFSA, you’d have paid 0% in taxes and all that interest would be left in your pocket. Plus, that interest would have stayed invested and compounded.
A high interest savings account is a great place to hold money for short term purchases like a vacation you plan to take or a large ticket item you plan to buy soon or an emergency fund for unexpected expenses. But why not hold your HISA inside a TFSA so that you don’t pay interest?
The caveat is this: If your HISA is held within a TFSA, it will most likely require a few days to access the money. That said, the same might hold true for a HISA held outside of a TFSA. So, if you think an emergency could crop up that requires you to pay the same day, and you have no other means of accessing funds temporarily, then keep some money in a HISA that allows same day access and the rest in a HISA held within a TFSA. Having more than one savings account is a fairly new concept for many of us, but with the advent of online banks comes the ability to have multiple accounts and to manage them quite easily.
One other thing to consider is that once you’ve reached your contribution limit for your TFSA, holding a HISA inside of it won’t make as much sense. In that case, you’d be better off holding investments in your TFSA that have more earning potential and that will save you more in taxes. That said, most people would only be so lucky to have their TFSA maxed out while actively saving for retirement, paying down a mortgage, savings for a child’s education, paying for daycare, paying for vehicle repairs and the list goes on.
Lastly, if you don’t do this already, consider setting up automatic payments so that funds are deposited each month from your chequing account, ensuring you’re actively saving.
If you don’t know what a TFSA is all about, including all the benefits it offers (well beyond just tax free savings), it’s well worth your time to find out. I’ve included some resources for you below. Have more questions? Get in touch, anytime.
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