Let’s say you have a spare $5,000. You want this money for travel… or a down payment on a car, or something else in the one to two year time frame. What’s the best current bet for getting a little bit of growth over a year?
Mutual funds and stocks could lose value. That’s probably not a good bet over the short term. Bonds could work in some situations, so that may warrant investigation. For now, I’m just going to focus on savings accounts and the tax implications.
All interest rates were captured on 3 Nov 2012. Let’s take a look at a few options. Let’s also have a look at tax implications for 2012.
Assumptions:
- One year investment period
- Marginal tax rate is 32% (22% federal, 10% provincial)
- There is contribution room for a TFSA
- $5000 to invest
- There is NO inflation adjustment necessary
Some Options:
| Institution | Rate (%) | Interest ($) | Taxes ($) | Net ($) |
| AMA/Bridgewater Bank | 1.85% | $92.50 | $29.60 | $62.90 |
| Canadian Direct Financial | 1.90% | $95.00 | $30.40 | $64.60 |
| Canadian Direct Financial TFSA | 3.00% | $150.00 | $0.00 | $150.00 |
| ING Direct Savings | 1.35% | $67.50 | $21.60 | $45.90 |
| RBC eSavings | 1.20% | $60.00 | $19.20 | $40.80 |
Discussion:
I find it odd that some institutions are offering a *higher* interest rate for TFSA savings accounts. I won’t fight it – it’s a fantastic option for those who are saving for the short term. Even as an emergency fund the TFSA offers a significant advantage over taxed savings accounts. Naturally, there are limitations placed on TFSAs and it’s important to work within those limitations to ensure that there are no service fees applied to an otherwise exceptional deal.
Why the disparity in interest rates? I can only assume that it’s because larger banks can get away with offering lower rates and still attracting customers. Perhaps the inconvenience of dealing with multiple institutions is worth the cost of not keeping up with the rate of inflation.