Saving for anything seems to be a bit more difficult than it used to be. With almost everything becoming more expensive, you may need to introduce a bit more organization and pre-planning into your savings goals, whether you intend to save for a new TV a few months from now or income during your retirement a few decades from now.
The catch is that there are many types of retirement accounts available and each one has a unique purpose. We’ll help you understand the types of accounts available as well as how to tailor your financial plan so that you can prioritize the type of savings account you need and capture the benefits for each type in the best way for you and your family.
What is a Savings Account in Canada?
A savings account is a type of account held at a bank that carries different rules than a checking account. You might use your checking account as the one where your paycheck goes and your debit card is connected to, but this is probably just a catch-all for your income.
Your checking account is usually very cheap or free to open and has very low fees or none at all. However, a checking account receives almost no interest, so you’re giving the bank free deposit money for the convenience of access to your money from anywhere.
A basic savings account generally has more restrictions from limited withdrawals and access to no withdrawals. You may be able to earn more interest in a savings account, but the purpose is for you to be able to save for longer-term goals.
What Types of Savings Accounts Are There?
There are several types of accounts. They start with simple cash-only savings accounts but can be focused more on investable savings for retirement. There are several options for you to consider for your savings goals, though here are some of the most popular.
– A Basic Savings Account is simply a type of account that stays in cash with your bank but may earn more interest than a checking account. Many large banks still offer relatively easy access to these funds, but they may restrict access to a certain number of withdrawals per month as well as a higher minimum account balance than checking accounts.
While you may earn more interest than a checking account, you would be hard-pressed to find anything more than about 0.30% interest on a basic savings account.
– A High Interest Savings Account is somewhat self-explanatory. You can earn more than 1.00% and even up to 2.00% interest on certain accounts and many banks may not have minimum account requirements. However, higher interest rates usually means more restrictions to account accessibility.
– A Tax-Free Savings Account is a type of registered savings account that is contributed to with after-tax money, meaning money that comes in your paycheck after taxes and deductions are taken out. The benefit of these savings accounts is that all earnings are tax free, and you can withdraw when you need to.
However, there is a maximum amount you can contribute per year and if you don’t re-deposit within a certain time, you will not be able to maximize tax-free earnings for that year.
– A Registered Education Savings Plan is another type of registered savings account that allows you to save money specifically to be used for a child’s education.
The contributions are made after tax, and the account can potentially earn up to 20% matched contributions from the Canada Education Savings Grant up to $2,500 per year ($500 maximum annual Grant contribution).
There is no maximum per year, but there is a $50,000 maximum contribution limit per individual, and the contributions can be invested or kept in cash.
– A Hybrid Bank Account is a new type of savings account offered by digital banks. They combine some of the benefits of a checking account with those of a high interest savings account to provide an account that earns more interest than a basic savings account but can be used for a limited number of payments like a checking account.
– A Youth or Senior Savings Account provides regular savings accounts to specific age groups and provides resources targeted to those groups to help them enhance their financial education. Senior savings accounts may also allow higher interest rates than basic savings accounts based on age of accounts.
How Can I Open A Savings Account in Canada?
The government has made it a right for Canadian citizens to open a bank account provided they can produce a valid form of identification. You do not need to show proof of a job nor do you need to have funds available to deposit immediately.
All you need to do in order to open a bank account is to go to the financial institution in person and provide them with an acceptable ID. Some banks may offer other methods for opening an account. If you have access to the internet, you can search any bank’s website to find out options for opening an account.
Opening registered savings accounts comes with additional requirements and proof of citizenship. While savings accounts can be opened by non-Canadian citizens, registered accounts require a Social Insurance Number to open, so be sure to call your bank before you begin the process.
Can A Bank Refuse to Open an Account For Me?
There are some regulations that protect banks by allowing them to deny applicants for several reasons.
1. The bank believes you are planning illegal activities connected to the account
2. You have a history of illegal activity
3. You knowingly provided false information in your application
4. You might harm the bank employees
5. The bank only offers accounts linked to existing accounts, and you don’t have one.
6. You keep the bank from verifying your identity.
If a bank denies you for any reason, they must provide you a reason in writing and they must provide you with contact details for the Financial Consumer Agency (FCA) of Canada.
Should I Open A Savings Account?
One of the best decisions you can make to organize your finances and plan for your future is to open a savings account. Make sure you have a plan in mind for exactly what you want your savings account to do.
Also, make sure you know what time frame you’ll be saving for. If you’re planning for retirement, a basic savings account is probably not the best idea for you. Lastly, you’ll want to research different institutions to see what fees they charge for their accounts.
The various types of savings accounts available allow most people to plan their financial future, whether the timeframe is near-term or longer-term.
If you’re saving for several smaller purchases – such as a TV and new kitchen appliances – at the same time, you can open several savings accounts with your bank and put money in at regular intervals. This way, you have the money all ready when you reach your goals.
Many banks allow you to even give nicknames to accounts so you know what they’re for. Once you’ve reached your goal, you can rename them for the next goal.
As for longer-term saving, the ability to contribute to a TFSA or RESP is a wonderful tool for capturing benefits offered in the form of either tax-free earnings or grant contributions.