Tiered Savings Accounts

Tiered Savings Accounts

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated November 23, 2021

A savings account is a basic type of bank account that is designed specifically for money to sit and grow with interest. The more money you have in the account, the more money you’ll earn in interest. 

Some savings accounts pay out a higher interest rate as you pass certain levels of account balances. So, the more you put into your account, the more likely you will be able to earn a higher rate on money deposited. These are called “tiered” savings accounts.

Let’s take a closer look at these types of accounts and help you determine if they’re something you may want to open. 

What Are Tiered Savings Accounts?

Banks make their profits off of money deposited in savings accounts by lending it out to others. They earn interest on this money loaned out and repay their own customers through an interest rate, which represents a very small portion of the profits they earn. 

Banks can only lend out capital that is given to them by their clients, which is why they offer interest rates to incentivize people to open bank accounts and deposit money into them. 

It’s in the best interests of banks for clients to keep their money in their savings accounts for long periods of time. The longer, the better. That’s because they can then use that money to lend out to others and earn profits from such loans. 

The more money you have in your savings account, the higher the interest rate the bank offers. They do this to encourage you to deposit more. You’ll earn more money in interest because you have more money sitting in your savings account. 

This is what’s known as the ‘tier system’. For example, you may earn 0.50% interest on a balance of $5,000 but can earn 1.00% on balances of $5,000 or more. 

This system may also be based on the length of time that your money is left deposited into your savings account. For instance, you may earn 0.55% after 90 days, 0.75% after 180 days, and 1.00% after 360 days, as long as you do not withdraw any funds during this time.

Partial Vs Whole Balances

It’s important to understand the difference between partial and whole balances, as this can affect the interest rate on your deposited funds. 

Partial Balance 

With this system, you’ll be paid the higher rate only on the amount exceeding the base amount. Using the above as an example, you would earn an interest rate of 0.50% on the initial $4,999.99, then 1.00% on any amount over $5,000. This system pays out less in interest compared to a whole balance system.

Whole Balance 

You’ll be paid out the highest interest rate the moment you reach the next tier, which means you’ll make more money with this system compared to a partial balance tier system.

Banks may also use a combination of the two systems. To illustrate, let’s say a bank offers 4 different tiers as follows: 

  • 1st tier: 0.30% for balances up to $2,999, using the whole balance system.
  • 2nd tier: 0.45% for balances between $3,000 to $5,999 using the whole balance system.
  • 3rd tier: 0.60% for balances between $6,000 to $9,999 using the partial balance system. 
  • 4th tier: 1.00% for balances over $10,000 using the partial balance system. 

In this example, the interest earned will be based on how much you have deposited, with each tier’s rate based on a different system as you climb the ladder. 

Final Thoughts

Rather than getting paid out one interest rate, regardless of what your account balance is, a tiered savings account rewards you with a higher rate with a higher balance. These types of accounts are ideal for consumers who intend to maintain high balances in their savings accounts. 

That said, you’d need to hold a few thousand dollars in your account or make it worth your while. If a tiered savings account offers a high interest rate — especially if it uses a whole balance system — it may be worth looking into to help your money grow over time. 

Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!

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