Compare Savings Rates – Tax Free Savings Accounts

May 23rd, 2010

Be sure to compare savings rates before you choose your Tax Free Savings Account – rates and fine print are different at various Canadian Banks. But first, you might be wondering:

What is a Tax Free Savings Account?

Tax free savings accounts were introduced by the Canadian government in 2009 and they are different from normal savings accounts in a couple of ways.

What is inflation?

What causes inflation

Save up to $5000 Per Year in your TFSA

Canadians can use a TFSA to sock away up to $5000 per calendar year, tax free.  This means any interest accumulated while the money is invested is not subject to income tax. All Canadians who are 18 years of age or older are eligible to open a tax-free savings account and Canadian banks are competing with each other trying to offer the best interest rates to attract new customers. In April 2010, ING Direct Bank was the winner, offering a solid 3% return on cash invested in the TFSA.

How does a Tax Free Savings Account Work?

By and large, a tax free savings account works just like any other savings account – with a few limitations and specifics.

  • Each eligible person can only save $5000 per year in the TFSA.
  • You can withdraw funds at any time.
  • You can only replace monies withdrawn in the following calendar year.
  • ie: If I contribute $5000 in 2010 but withdraw $2000 for a vacation, I must wait until 2011 to replace that $2000 if  I wish to do so.

As with Registered Retirement Savings Plans (RRSPs) unused saving space in a TFSA can be accumulated and saved for contributions in future years.

Tax Free Savings Accounts in a Nutshell

* Allow Canadians to save up to $5000 each year, tax free.
* All interest earned on the savings is not-taxable.
* Any amount of money may be taken out of the account at any time.
* Any money withdrawn may not be replaced until the following calendar year.
* Available savings space may be accumulated and used at a later date.

Read The Fine Print and Compare Bank Accounts for the Best Rates and Terms

Do note that some banks have fine print about taking money OUT of the Tax Free Investment Savings Account. Any such regulation is specific to the bank itself — the government has no limit on how much you can take out. The only federal rule is that you can’t replace withdrawn money until the following calendar year.

Compare Bank Accounts

The following chart compared the interest offered on Tax Free Savings Accounts at several major Canadian banks. All information was compiled in mid-April 2010 and was current at time of publishing.

* 3% – ING Direct
* 1.25% – TD Canada Trust
* 1% – CIBC
* 1.5% – ScotiaBank

Tax Free Savings Accounts are Just Bank Accounts

Canadian Banks are full of the usual PR BS when it comes to providing info about  TFSAs. Not surprisingly, many are  presenting the accounts as though they are their own personal gifts to their customers.
Remember, the tax-free status of the account is a federal tax break – not a gift from the bank. A tax free savings account may be had at any Canadian bank and at the end of the day is little more than a simple savings account – with terrific tax benefits.