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As a Canadian, there are plenty of banking and investment accounts that you can sign up for. Some accounts, like the TFSA, even combine those concepts to get the most out of your money. However, most financial institutions also offer basic savings accounts for everyone. Read this to learn the differences between a TFSA vs a savings account. 

TFSA vs Savings Account

While they are similar in certain ways, TFSAs and savings accounts can affect your finances differently, so make sure to do your research before opening either one. Talk to your bank or credit union about the specific details of their TFSAs vs saving accounts:    

What Is A TFSA?

Introduced by the Government of Canada in 2009, a Tax-Free Savings Account (TFSA) is a registered tax-advantaged savings account where you can store and earn interest without paying tax on it. In it, you can hold eligible investments that may generate capital gains, interest, and dividends (tax-free) to reach your savings goals more efficiently. 

Features Of A TFSA

Before opening a TFSA, it’s important to understand its features and how it can benefit you. Whether you’re looking to pay off debts, save for a home or some other big purchase.

Contribution Limits

The Canada Revenue Agency (CRA) sets limits for how much money you can add to a TFSA each year. You can learn your limits through your TFSA provider or CRA My Account. A normal savings account doesn’t have a contribution limit and may feature a higher or lower interest rate than a TFSA.  

If you don’t have the cash to meet your contribution limits, you could take out a personal loan to invest. However, this can be very risky if you don’t have the funds to repay the loan if the investment tanks. Moreover, you’ll want to make sure you have good credit to secure a low rate. High rates will take away any interest you gain on the investment.

Interest Gained Is Not Taxable

One of the best aspects of a TFSA is that you don’t have to pay taxes on any gains you make on the money or investments inside it. On the other hand, Canadian tax law states that you must pay taxes on any gains you make using a normal savings account, even if some providers overlook that rule.    

Withdrawals Rules

TFSAs are great because you’re allowed to withdraw money from them tax-free too, which can leave you more funds for larger costs. Plus, any money you withdraw from it can be re-contributed in the following or subsequent years, with no impact on your contribution room for those years.  

Variety Of Investment Options

You can invest your money in a number of qualified investments in a TFSA, each of which may have different benefits and drawbacks based on your savings goals, so get more information from your provider. Qualified investments include:

What Is A Savings Account?

Savings accounts are available with almost every financial institution. They allow you to store your money and earn interest on funds you save. Most savings accounts are insured by the Canada Deposit Insurance Corporation (CDIC).

Features Of A Savings Account

Like a TFSA, it’s important to understand the features of a savings account to see if it is right for your savings goal

Interest Income

Any interest your money generates will grow your savings account over time. Normally, your financial institution will calculate the interest daily and pay it into your account monthly, but check with them to be sure.    

Interest rates on savings accounts are also low compared to certain TFSA investment accounts. Moreover, interest gained in your savings account is subject to tax. 

Minimum Threshold

Some savings accounts will feature a minimum balance threshold that you must stay above to earn interest on your funds. A lot of banks will also waive your monthly account fees when you maintain a specific balance.    

Limited Transactions

Although most savings accounts are free, many charge service fees if you go over a certain number of transactions per month. Luckily, many online banks now offer free savings accounts with unlimited transactions.       

How To Open TFSAs vs Savings Accounts

TFSAs and savings accounts are both very easy to open. All you have to do is find a financial institution whose account matches your needs. Don’t forget to do some research and weigh your options carefully before making your choice.    

How To Open A TFSA

If you’re a Canadian resident with a valid Social Insurance Number (SIN), and at least the age of majority in your province or territory of residence (18 – 19 years old), you can apply for any tax-free savings account. 

Can You Keep A TFSA As A Non-Resident? 

If you become a non-resident after opening a TFSA, you may keep it open without being taxed on any earnings or withdrawals you make. However, any contributions made as a non-resident will be subject to a 1% tax for every month the money stays in your TFSA. Certain exceptions may apply. 

Additionally, your TFSA contribution room won’t accumulate while you’re a non-resident.

How To Open A Savings Account

Although the requirements depend on your financial institution and personal situation, you must present at least one of these government documents to apply for a savings account in Canada (unless you’re a minor accompanied by a parent or guardian):

  • Canadian driver’s license
  • Canadian passport
  • Canadian birth certificate
  • Social Insurance Number (SIN)
  • Health insurance card that qualifies as ID (under provincial or territorial law)

Other Documents You Can Provide AS A Newcomer

  • A document or card with your photo and signature, issued by select authorities 
  • Permanent Resident (PR) card or Immigration, Refugees, and Citizenship Canada (IRCC) form IMM 1000, IMM 1442, or IMM 5292
  • Certificate of:
    • Indian Status
    • Canadian Citizenship
    • Certificate of Naturalization     

TFSA vs Savings Account; Which One Should I Choose?

Remember, research is key when choosing a bank account. Don’t hesitate to compare multiple TFSA vs savings account providers and ask them any questions you have, because both accounts have benefits and drawbacks that could affect your finances.    

Choose A TFSA If:

  • You Have Long-Term Savings Goals – Even though the funds in a TFSA aren’t locked in, it’s a better idea to keep them saved for as long as possible. This can help you make the best returns on your investments. TFSAs also pair well with RRSPs
  • You Want To Invest In Stocks/GICs, etc. – You can use a TFSA to buy almost any investment product with less risk and more liquidity, as is the case with GICs. Stocks and ETFs are longer-term investments with higher risk but better returns.
  • You Want To Maximize Tax-Free Returns – Since you don’t have to pay tax on the funds in a TFSA, you might be able to maximize your profits (within your risk tolerance) and benefit from compounding non-taxable returns in the long-term.    

Choose A Savings Account If:

  • You Have Short-Term Savings Goals – Savings accounts usually make more sense for short-term goals because they’re easy to access and often have a low taxable interest. Common examples include sinking funds and household bills.  
  • You Need An Emergency Fund – A savings account is also a good option for emergency costs, like medical bills, loss of employment, or home repairs. Most people will save at least 3 to 6 months of emergency funds in a savings account.    
  • You Want Fast/Immediate Access – If you prefer not to worry about contribution room or the potential for a greater loss of gains on your investments, a savings account is the way to go because of how easy it is to withdraw money from one.     

Opening A TFSA vs Savings Account

Whether you’re looking to build an emergency fund, pay down bills, or make long-term investments, there may be dozens of different bank account options available to you as a Canadian or non-resident, including TFSAs and savings accounts. For more information about TFSAs vs savings accounts, visit the Loans Canada website today.  

TFSA vs Savings Account FAQs

What if I become a non-resident of Canada?

If you have a TFSA, then become a non-resident of Canada, no contribution room will accumulate for any year of your non-residency term. As long as you have a valid SIN, you can also open and hold a TFSA. However, any contributions you make while you’re a non-resident will be subject to a 1% tax for each month that they stay in your account.  During your non-residency, withdrawals get added back to your TFSA contribution room the following year but will only be available if you become a Canadian resident again. 

What’s compound interest?

Compound interest is a type of profit you can earn on the initial deposit or principal in a savings account. Any interest it accrues will be added to your total savings, which you’ll continue to earn interest on. Basically, it means your interest will earn its own interest and the more often your interest is compounded, the further your savings will grow. Most financial institutions offer annual compounding interest rates on savings accounts, but some will compound interest on a daily or monthly basis. Savings accounts that compound interest daily will often generate interest faster than those that do it monthly. 

Can I open a savings account online?

If you provide the appropriate documents and information, plenty of banks and credit unions will allow you to open a savings account or TFSA online, which can be far more convenient than doing it in-person or over the phone. Before you do this, make sure to confirm that the account is free (or at least affordable) and offers all the perks you want. 
Bryan Daly avatar on Loans Canada
Bryan Daly

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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