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TFSA vs Savings Account – Which One to Choose?

TFSA (Tax-Free Savings Account) is a popular investment option in Canada. It holds significant value in many aspects. Beyond a savings account, you can also store investments like mutual funds, stocks, ETFs, bonds, etc. in a TFSA. TFSA vs savings account is a debatable topic and I am going to address it here today. 

In TFSA vs Savings Account, the former carries better chances of return as they are slightly risky. But it is worth it. In this article, we learn how TFSA differs from a savings account and what are the different factors related to both. Keep reading to find out which one is more suitable for you. 

Read: How to Invest in TFSA in Canada?

What Does Investing in TFSA Entail?

Tax-Free Savings Accounts (TSFA) started in the year 2009, and since then, Canadians seem to have welcomed it with open hands. 

A tax-free savings account or a TFSA is a registered account that gives you the freedom to invest or save and get returns for the same. It includes benefits like interest, dividends, capital gains, etc. and these benefits are tax-free. You can use it to invest for both short-term and long-term or for your retirement goals. 

To be eligible for a TFSA account, you should be 18 or above. TFSA continues even when a person is retired, unlike RRSP which obliges you to convert or close it as your turn 71. For TFSA, there is a certain limit of investing every year For 2022, this limit is $6,000. For the clawback option in the Old Age Security (OAS) pension, the government considers RRSP withdrawal but with TFSA, that is different which can benefit you.

You can make a TFSA withdrawal anytime, put in that amount back, and more without incurring any penalties. 

Read: Can You Transfer RRSP To TFSA Without Penalty?

What Can You Invest in a TFSA?

You can invest different kinds of financial products in a TFSA, this includes:

  • Cash
  • Stocks
  • Bonds
  • Mutual Funds
  • Exchange-Traded Funds (ETFs) 
  • GICs or Guaranteed Investment Certificates 

However, Canadians choose cash as the prime investment for TFSA. In order to get higher returns, you should research well for the interest rates.  

Read: Top 15 RRSP & TFSA Mistakes To Avoid In Canada!

What Does Investing in a Savings Account Entail?

Savings accounts earn interest on the money that you deposit. This interest is provided until your money stays in the account. The savings accounts are insured by the CDIC or the Canada Deposit Insurance Corporation (CDIC). While the accounts in the credit unions are protected by Provincial Deposit Guarantee Corporation. 

Advantages and Disadvantages of a Savings Account 

Every coin has two sides and so do safe and secure savings accounts. See the below pointers.

Read: Your Guide to Investing in Index Funds in Canada!

Advantages of Savings Account

More Accessibility

You can take out your money from a savings account at any time without any restrictions or locking period like GIC.

Zero Monthly Fee

Chequing accounts come with a fee but savings accounts are not levied with a monthly fee. 

Read: All You Need To Know About Taxes On OAS In Canada

Earn Interest

You get interest on deposited money and this grows your money over time. This interest is calculated daily and added monthly, but confirm if your bank has some different way of calculating it. 

More Security

In a savings account, your money is put in the bank account by physical technological securities. You also get insurance for a specific amount in case the bank becomes insolvent. For instance, you get a CDIC insurance of up to $100,000 on each deposit category. While many credit unions also offer coverage of $250,000 or unlimited. 

Read: All You Need to Know About Canada Fed Deposit in 2022!

Disadvantages of a Savings Account

Dynamic Rates

The savings account interest rates are not fixed, they can change as per the discretion of the Bank of Canada and its key lending rate. It also means the banks will adjust their prime rates. Banks also tend to change these rates on their whim, which is not a good reliability factor. 

Transaction Cap

You are free to deposit your money in a savings account, but you are levied with a service fee after doing a couple of transactions. Many online banks also provide savings accounts without transaction caps too, you might have to inquire a bit about this.

Read: Amazing Investment Options in Canada to Grow Your Money

Threshold Limit

If your account money does not match the threshold limit of the bank, the interest will not be provided. 

Low Rates

Savings account rates are known for being low which means your money is not actually growing. Moreover, these rates are not compatible with inflation, and you could be losing out on purchasing power. You can counter this disadvantage by looking for promotional offers or investing in HICs. 

Read: Leading Bank Accounts for Students in Canada (2022)

What Are the Types of Savings Accounts?

On the basis of different goals, the types of savings accounts are:

Children or Youth Savings account

This account for kids is beneficial if you are looking to learn about baking basics and fee payment. It offers good rates and also waives fees on some of their transactions. 

Joint Savings Account

This account allows couples and joint owners to deposit their savings in one account. And this can also lead to the insurance being doubled. 

Read: A Comprehensive List of High-interest Savings Accounts in Canada

Regular Savings Account

This account is the most traditional savings account which is opened automatically as the checking account is opened. 

HISA (High-interest Savings Account)

This kind of savings account is usually rendered by online-only banks and credit unions. The rates for this kind of account can go up to as much as 125x of the rates of savings accounts. 

Registered Savings Account

The registered savings accounts include RRSP, TFSA, RESP savings accounts. This is also tax-deferred or tax-free. 

Hybrid Savings Account

This account is a mix of both savings and checking accounts. For instance, this includes debits, e-transfers, mobile cheques, deposits, etc. 

Read: Great Deals on Bank Accounts for Newcomers in Canada

The Bottom Line – TFSA vs. Savings Account

The difference between TFSA and savings accounts is that TFSA offers more competitive interest rates as compared to savings accounts. You can, as a result, expect to gain more with TFSA. For example. EQ Bank offers a 0.05% rate of interest for a savings account. While the interest rate for a TFSA is .25%. Do you see a huge difference? The tax benefits are an added advantage. 

Where you want to invest in the debate of TFSA vs Savings account is your choice. But make sure that it aligns with your goals and you can rely on it for better returns in the long run.

Read: 5 Amazing Tax Refund Spending Ideas in Canada


Devanshee Dave

Devanshee is a staff writer at YourFirst.ca. She is a finance enthusiast and has completed her Master’s degree in Mass Communication & Journalism. She has worked as a journalist in a local business newspaper, multiple start-ups as well as finance and economy-related online media houses.

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