What Are High-Interest Deposit Accounts & Why You Need One in 2024
Many different types of financial products are available to serve various needs and help Canadians build diversified portfolios. You can choose accounts that help you with things like investing in your future, saving money, making purchases, and paying bills. High-interest deposit accounts are one way to help maximize your savings and work toward your savings goals.
You can choose from several different high-interest savings accounts (HISAs) offered by various financial service providers in Canada. These accounts may have different perks, features, and interest rates. There are ways to compare high-interest deposit accounts and align them with your specific situation and needs. It can help set you on the right path toward reaching different financial milestones.
Use this guide to learn about high-interest deposit accounts and why you might want to consider them as part of your financial portfolio this year.
What is a high-interest savings account?
A high-interest savings account (HISA) is a type of account that can help Canadians maximize their savings with higher-than-average interest rates. For example, while you may earn a 1.00% interest rate in a traditional savings account, you may earn 4.00% on a HISA. A HISA can help earn extra interest to help you reach your goals quicker than a traditional account.
Savings account vs. chequing account
A savings account differs from a chequing account in a few ways. The main difference is that a chequing account is an everyday account used to access and spend your money, while a savings account is used to deposit money you want to save for the future. A chequing account may also be called a transactional account because you use it to make transactions like making purchases or paying your household bills. You may access the funds in your chequing account frequently.
On the contrary, you (ideally) leave the money in your savings account until you have reached the necessary funds for your short- and long-term goals. You can hold the money for various periods, and you’ll earn interest on the deposits based on the interest rate of the savings account. You can set up the savings account with the same provider as your chequing account or with a different provider, depending on the interest rate and features you want. Keeping your savings in a dedicated account can help you stay accountable for your savings goals.
How does a high-interest savings account work?
Several features define a high-interest savings account and how it works to help Canadians maximize their savings and reach their financial goals. It’s important to understand how HISAs operate so you can optimize their benefits and know what your responsibilities are.
HISA rules
You earn compound interest in a HISA based on the interest rate set by the financial institution. Compound interest means you earn interest based on the deposits you make into the account and the interest accumulated from previous periods. Compounding periods can be daily, monthly, quarterly, semiannually, or annually.
You can typically transfer money between your chequing and HISA easily to set aside money in your savings. Some HISAs may have no annual fees or deposit limits. This means you don’t have to pay money to hold the account, and you can deposit as much or as little as you want. However, depending on the account, there may be transaction fees, like email money transfers, non-bank ATM withdrawals, interim statement fees, and cross-bank transfers.
How HISAs earn interest
For a savings account with compounded interest, the financial provider compounds interest on deposits and accrued interest from previous periods. It means your interest earnings are reinvested into the account to continue to earn interest for you in the future. Since interest is earned on a higher amount, the interest you earn increases with each period. The longer you keep your funds in a HISA, the more interest you earn.
HISA investment
A HISA can be a useful investment tool to meet various financial goals. The compound interest helps accelerate your savings and maximizes your earnings potential. A HISA may be a good option if you’re risk-averse or have shorter timelines and don’t want to invest your money. Your account consists of the deposits you make and the interest you earn.
Some savings goals suitable for a HISA include your emergency fund, tuition, car, down payment, vacation, or new furniture. If you keep your savings in your chequing account, you may be tempted to spend it on shopping or bills. Putting money aside in a HISA ensures you have a dedicated account to keep your money separate.
You can compare HISAs to find the best interest rates and features. With the rise of online financial providers and fintech companies that provide financial products and services, you have more options to consider.
Some online providers and fintech companies may also offer intuitive, user-friendly platforms and mobile apps that provide valuable insights and tracking metrics. These tools make it easier to monitor your savings progress and how your deposits compare against your targets. It can help make it easy to realign your finances with your goals when needed to ensure you have enough money when the time comes.
HISA taxes
With interest earned on a non-registered savings account, you have to pay taxes on the interest. Your interest earnings are part of your general income. You’ll have to pay taxes on your taxable income based on provincial and federal tax brackets. If you want to reduce your taxable income, consider depositing money into a registered retirement savings plan (RRSPs) or a tax-free savings account (TFSA).
You’ll receive a T5 tax slip from the financial provider. The T5 tax slip is the statement of investment income form. You report all your investment income on the T5, such as interest earned in a high-interest savings account, eligible dividends, and interest from an insurance policy. You can find the T5 form for your high-interest deposit account by logging into your account, or the financial institution may send it to you by mail.
TFSA vs. HISA
One main difference between a tax-free savings account (TFSA) and a high-interest savings account is that any interest or investment profits you earn within a TFSA is tax-sheltered. You don’t have to report it in your tax return when you earn the income or withdraw from your account.
You can purchase various investment products in a tax-free savings account, such as stocks, exchange-traded funds (ETFs), cash, mutual funds, and guaranteed investment certificates (GICs). You can customize your TFSA portfolio based on your risk tolerance and timeline. For example, you can choose riskier investments if you want more risk, or earn interest on cash if you’re risk-averse.
A HISA holds cash deposits instead of various financial products, which makes them lower risk. If you invest in the stock market or other products, there may be a risk of losing your principal amount because financial markets can be volatile. You earn compound interest based on the interest rate and receive the interest in your account based on the compounding period. You’re required to pay taxes on any interest earnings.
You can open a TFSA as long as you’re a Canadian resident, have a valid Social Insurance Number (SIN), and are at least 18 years old. Compared to a TFSA, the age restriction for a HISA may be lower depending on the financial provider. Some institutions offer HISAs geared towards youth and students to encourage saving money. These accounts typically have features and rewards designed based on the needs and interests of the account holders.
There is also a limit on how much you can contribute to your TFSA each year. However, there typically aren’t annual limits with a high-interest deposit account. Whether you’re just starting to save or want to transfer your funds to an account that earns higher interest, you can use the HISA flexibly based on your needs.
RRSP vs. HISA
An RRSP is a registered retirement savings plan to help Canadians save for retirement. Contributions to your RRSP reduce your taxable income. Any interest or investment income you earn on funds in your RRSP is also exempt from taxation as long as the funds remain in the RRSP account. You must pay taxes when you withdraw money from your RRSP account.
Many Canadians may use high-interest savings accounts for short-term financial goals, like an emergency fund or an upcoming large purchase. However, retirement is typically a long-term goal for many people when they open their RRSP account. Like a TFSA, you can purchase various financial products in your RRSP, such as stocks, bonds, mutual funds, and exchange-traded funds. Since you have a longer timeline, you can worry less about investment fluctuations.
A high-interest savings account is more accessible than an RRSP. While you can access your funds anytime if your RRSP isn’t locked in, withdrawals are subject to withholding tax, and you have to report the amount as part of your taxable income. But with an HISA, you can always access your funds and make withdrawals, deposits, and transfers.
GIC vs. HISA
A GIC is a guaranteed investment certificate. It’s a Canadian investment that offers a guaranteed rate of return over a fixed period. Compared to many other investment products, like stocks and exchange-traded funds, GICs have less risk as you don’t lose the value of your principal. However, you typically get a lower return rate compared to other investments.
While you may get a higher return on your investment in a GIC than in a high-interest savings account, there are some downsides to purchasing GICs. The biggest one is that your GIC is usually locked in until your term matures. For example, if you purchase a GIC with a five-year term, your money is locked in until the end of the fifth year. A GIC can have a maturity date as little as 30 days or up to five years. There may be penalties for withdrawing your funds earlier than the maturity date.
A GIC may be a good choice if you want a higher return than a HISA and don’t need to access your funds before the term ends. If you expect to need the money sooner or are unsure of when you need to access your funds, you might want to consider opening a high-interest savings account instead. For example, a HISA may be a better option for your emergency savings as you can withdraw the money at a moment’s notice.
Who should open a high-interest savings account?
There are several situations in which a HISA may be ideal for your funds and financial situation. Let’s explore some of these scenarios.
Starting an emergency fund
An emergency fund is money set aside as a cushion for a rainy day. No matter how well you plan and prepare for the future, accidents and emergencies can happen that may leave you in financial trouble. Your emergency savings can help as your safety net in these situations to pay for unexpected costs that arise.
A HISA can be a great place to store emergency savings because you earn low-risk interest payments and higher interest rates than traditional savings accounts. You can easily cash out the money, so you don’t have to worry about being strapped for cash in an emergency.
Short-term savings goals
Short-term savings goals are anything you wish to accomplish within the next year or two. Everyone has different short-term goals depending on their lifestyles, needs, and life stages. Examples of common short-term goals include paying rent, paying off a car loan, going on a vacation, or buying a new purse. You can make regular contributions to your HISA based on your timeline and how much you need to save.
Large but predictable expenses
When you know how much you’re going to spend, you can create a plan to help save the money. Create a list of large but predictable expenses you have. Perhaps it’s a renovation project, your property tax payments, or loan payments. You know exactly when you need the money and how much you need to put aside. You can create a savings plan to help you save for these expenses in a realistic way based on your situation.
How to choose the best high-interest savings account
Choosing the right high-interest savings account can be important to help support your financial journey and health. Compare HISAs from different financial institutions and providers to determine what suits you best. In addition to the interest rate offered, you should also look at features like perks and benefits, account fees, and minimum balances. Consider what parts of a savings account are most important to you and align your choice with your priorities.
If you want to maximize your savings as much as possible, you’ll probably consider a savings account with the highest interest rate available. If you want to earn bonus rewards, you may find a HISA with extra features. And if you want to save more money, you may want to look for accounts with no or low annual fees.
How to open a HISA
There are a few options to open a HISA, such as submitting an online application or visiting the financial provider in person. Most online providers have online applications you can fill out from the comfort of your home, and you’ll be required to submit your personal information.
Ready to open a HISA? Look no further than the Neo High-Interest Savings account. With no minimum balance requirements or monthly account fees, you’ll earn 4.00% interest¹ on every dollar. You can open multiple accounts for different savings goals and track your savings progress, or transfer money and add funds whenever you want.
Learn more about the Neo High-Interest Savings account to get started today.
This article provides information and is not intended to provide any personalized tax, investment, financial, or legal advice. You are encouraged to seek professional advice before making financial decisions.
¹ Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.
