Starting a New Savings Account: Tips & Tricks on What to Look For
Are you considering opening a new savings account? Today’s Canadians have many options, from in-branch traditional accounts, to online savings accounts, and even tax-sheltered accounts. Wondering how to choose which account is best for you? Read on for tips and tricks to choosing a new savings account.
What Are You Saving For?
Before rushing out to open another account at your bank, think carefully about what you’re saving for. Typical savings goals include an emergency fund, a short-term goal like a new vehicle or down payment for a home, retirement, and saving for your children’s education.
Some savings accounts are better suited to certain goals than others. For example, an emergency fund or short-term savings goal should be easily accessible, so a high-interest bank account or a Tax-Free Savings Account (TFSA) with a cash component makes sense.
Money for retirement savings isn’t usually withdrawn until retirement, so a tax-sheltered Registered Retirement Savings Plan (RRSP) — where money can grow tax-free — could be the best option. Opening a Registered Education Savings Plan (RESP) offers tax-sheltered growth opportunities, plus the chance to receive grant money to add to education savings, so this may be a good choice to save for your kids’ education.
Tip: Automate your savings and include monthly savings as an item in your household budget. Set up an automatic transfer from your chequing account to a new savings account. This helps remove the temptation to spend the money before you save it.
Watch for Transaction Fees
Before opening a savings account, ask if it has monthly charges or transaction fees. This is especially important with traditional financial institution savings accounts, which may charge for each deposit, withdrawal, automatic payment, or even direct deposit that occurs.
Trick: Consider an online high-interest savings account that lets you transfer money between accounts online and for free.
Savings Accounts and Taxes
Another thing to consider when opening a savings account is how your contributions and earnings will be taxed. Some savings accounts, such as RRSPs, don’t tax contributions or the income earned by savings within the account. TFSA and RESP contributions are made with after-tax money, though the income earned within the plans grows tax-free.
Traditional savings accounts don’t offer a tax break on contributions or earnings, so expect to add any income earned on these accounts to your taxable income yearly.
RRSP withdrawals –except those under the Home Buyers’ Plan (HPB) and the Lifelong Learning Plan (LLP) — are taxable to you, while RESP withdrawals are taxable in the hands of the beneficiary or student if they are made while the student attends an eligible post-secondary institution.
Tip: Though the TFSA limit was lowered to $5,500 per year from $10,000 annually as of January 1, 2016, if you haven’t used your previous year’s’ contribution room you may be able to contribute more than $5,500 this year.
Visit the Canada Revenue Agency’s My Account for Individuals to find your current TFSA and RRSP contribution room.
When Will I Get The Best Rates on My Savings Account?
Though interest rates have been low for the past several years, some financial institutions do offer time-limited rate bonuses or other specials at certain times of the year.
Trick: Open a savings account during tax time – January through March. This is when financial institutions offer their best rates and deals on high-interest savings accounts, TFSAs, RRSPs, and RESPs because they know Canadians are thinking about finances, revisiting their financial goals, and completing and filing taxes during these months.
When it comes to savings, the most important thing to remember is simply to get started. You can always increase your contributions or even switch your savings to another financial institution at a later date if necessary.