Savings Deposits in Registered Accounts
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When you have extra money that you don’t need for day-to-day uses, many people put it in a savings account to earn some interest without sacrificing access. If you’re saving for a specific goal, however, you also have the option to put your money in a registered account. There are many benefits with these accounts, such as taxation deferrals, access to possible government grants, and no annual contribution limits and withdrawal limitations.
What are registered accounts?
Registered accounts can be used for specific goals. If you’re saving for a child’s education, you may want to put your money in a Registered Education Savings Plan (RESP). If your child has a disability, you can also invest in a Registered Disability Savings Plan (RDSP). And if you’re saving for retirement, you may want to look at a Registered Retirement Savings Plan (RRSP). All of these are subject to different government rules regarding contributions, withdrawals, and taxation.
What’s inside a registered account?
Many registered accounts, such as RRSPs, hold investments like stocks and bonds. Stocks generally have the potential to appreciate more, whereas bonds generate interest income.
Here is an example table showing a possible breakdown of someone’s RRSP. This illustrates where a savings deposit may fit into a person’s portfolio:
What are my savings deposit options in a registered account?
Much like a savings account, a savings deposit has the two attributes that savers are looking for: protection of principal and the generation of income. In the unlikely event that the bank fails, up to $100,000 of what is in each of your savings deposits is insured by the government-run Canadian Deposit Insurance Corporation (CDIC). In reward for your deposit, banks will pay you interest. Although the rates may seem marginal, remember the objective for these accounts is to save for the future and guarantee your money is there when you need it.
There are three options to consider:
- Guaranteed investment certificates (GICs). They will guarantee you a return of the principal (the initial amount you invested) and interest at a rate specified. GICs are a good option if you want a higher rate of return.
- High-interest savings. While the interest rate may not be as high as a GIC, the rate will be higher than a savings account. You may have to open another registered account to get this option.
- Savings account. This will have the lowest rate but is a good option if you need access to the funds quickly (Read below for more details).
A savings deposit by any other name
Where things may get confusing is when you look at some of the other accounts your bank offers. For example, RBC offers accounts that are actually called savings deposits. As well, BMO has an RSP Premium Rate Savings Account, which isn’t called a savings deposit but is effectively one. It has all the same characteristics, offering protection of principal plus some interest within a registered account; unlike a GIC, there’s no minimum holding period and no penalty for early withdrawal. The lesson here is that you may come across an account at a financial institution that does not use the term “savings deposit” but is one in all but the name.
How interest is calculated and paid within savings accounts
With a savings account, interest is paid at regular intervals throughout the year, and is added to your principal. For example, at RBC, interest is calculated daily and is paid semi-annually. Should you withdraw the money from the savings account early, you will be paid all the interest accrued up to that point. This is another advantage of registered savings accounts: they can be redeemed immediately without penalty, so long as they remain in the tax-sheltered structure.
What are the disadvantages of using savings accounts?
The one glaring downside to savings deposits is the low interest rate. For example, RBC currently only pays 0.05% to 0.20% interest*, depending on how high the balance is. As a result, it’s not a good idea to keep a large amount of money in a savings account for too long. Due to inflation, the purchasing power of your money will continue to decrease over time. Just to keep up with 2% inflation, for example, you need to make 2% on your money annually and that won’t happen within any of these options.
Savings alternatives to keep in mind
In most cases, a savings account is not your best option for long-term investing. You can get much higher interest rates in GICs, for instance, while retaining CDIC coverage for your investment. Say you have money sitting in a BMO savings account and you know you won’t be investing it elsewhere for six months. You can continue earning 0.20% or you can put it in a short-term GIC and make 1.00% interest instead.
Of course, if you think you might need the money soon, the savings account may be the better option after all. The correct choice will depend on how much interest you want to earn and how soon you might need to use the money.