You’ve worked hard and saved diligently. You’ve made sacrifices in the name of saving. And your two best tax shelters – the registered retirement savings plan (RRSP) and tax-free savings account (TFSA) – are growing each day.
With all of those deposits, however, you’ve been slowly working toward your contribution limits. For your RRSP that’s 18% of your lifetime income to a maximum of roughly $25,000 a year. (The RRSP contribution limit for 2019 is 18% or $26,500, whichever is lower). For your TFSA, that’s $63,500 if you were born before 1991.
Those limits are important because of the steep penalties you can face for going over. For both your RRSP and TFSA, you will pay a tax of 1% of your excess contributions per month – that’s not good for your savings.
When your TFSA and RRSP are maxed out and you’re looking to avoid penalties, try two trusty non-registered savings vehicles: high-interest savings accounts (HISAs) and guaranteed investment certificates (GICs). These savings tools don’t have any contribution limits or penalties. And they can help you keep your money safely saved while you wait for more contribution room to open up in your TFSA and RRSP on January 1st.
What is the Difference Between High-Interest Savings Accounts and GICs?
High-Interest Savings Accounts
A high-interest savings account does pretty much what the name suggests. Unlike big bank savings accounts which pay little or no interest, a high-interest savings account pays enough interest to beat inflation and help your savings grow. Like with your TFSA, you can make deposits and withdrawals at any time without any penalties or tax implications. And the best high-interest savings accounts are completely free.
GICs are savings tools that lock in your money for a set period of time, known as the GIC term. The longer the term, the more interest you can earn. You can buy GICs for as little as 30 days up to 5 years. They sometimes offer better interest rates than high-interest savings accounts, too. But like your RRSP, the money you save in a GIC will be locked away and can’t be accessed without penalty until the term is up.
Exceeded your TFSA Contribution Limit? Use a High-Interest Savings Account
The best part about a TFSA is that you can withdraw money at any time. Since you’ve already paid income tax on the money you’ve contributed and the interest earned in a TFSA is tax-free, you’re free to take your money out and spend it at will.
A high-interest savings account offers the same freedom and flexibility: you can deposit and withdraw as much as you want at any time. The only difference is the interest you earn in a non-registered high-interest savings account is taxable. Still, this only affects you at tax time. When you take money out of a high-interest savings account, no tax is withheld.
If you’re looking to open your first high-interest savings account, a great choice is the EQ Bank Savings Plus Account. It currently pays 2.30% interest, has no monthly fee, and includes unlimited transfers and Interac e-transfers. Importantly, this account is covered by Canadian Deposit Insurance Corporation (CDIC) insurance. This coverage protects your savings (up to a $100,000) in case of problems with the financial institution.
You might also want to consider the Alterna Bank High-Interest eSavings Account. It features a 2.30% interest rate, as well as unlimited bill payments, transfers and debits. It’s covered by CDIC insurance as well and no minimum balance is required.
Exceeded your RRSP Contribution Limit? Try a GIC
Your RRSP is long-term savings intended to be withdrawn in retirement, so in this case, you might benefit from saving in a GIC. This will create the same locked-in effect for your money and remove the temptation to withdraw it for other purposes. The only downside is you won’t enjoy the same tax benefits you get with an RRSP; the interest you earn in a GIC will be taxable.
As with high-interest savings accounts, the best GICs are often found at financial institutions other than the big banks. Oaken Financial is a long-standing market leader in terms of rates – their 5-year GIC rate is 3.05%, which is tied for the best in Canada, and is higher than any high-interest savings account. Oaken Financial GICs are CDIC insured, and require a minimum investment of $1,000.
Another competitive option for GICs is Implicity Financial. If you’re not a fan of banks, you might prefer this option knowing that Implicity Financial is a division of Winnipeg’s Entegra Credit Union. As such, Implicity Financial GICs are not covered by CDIC insurance, but still come with solid coverage from the Deposit Guarantee Corporation of Manitoba.
Don’t Let Contribution Limits Stop You from Saving
It’s a rare accomplishment to max out your RRSP and TFSA. It’s a sign that you’re doing the right things – and you should continue to do so. When your registered accounts are maxed-out, look to high-interest savings accounts and guaranteed investment certificates to keep you on the path to financial success.