The latest generation of high-rate savings accounts are an excellent place to park money you need to keep safe and available on short notice.
But if you want a better interest rate, consider keeping your savings in an investment account. The investment industry has created what amounts to a savings account packaged for investors. These products are called investment savings accounts and they’re typically eligible for coverage through Canada Deposit Insurance Corp.
Rates on ISAs range from 4.25 per cent to 4.5 per cent – expect these returns to track any adjustments down or up in the Bank of Canada’s overnight rate. Savings accounts from alternative banks and other financial institutions are as high as 4.1 per cent right now, but most are in the 2- to 4-per-cent zone.
ISAs are offered through big and small banks and traded like mutual funds, which means you need a fund code to place an order. A helpful listing of ISAs and their codes has been compiled by the Mr. Thrifty blog. Series A units are for everyday use, while slightly higher-returning Series F is generally for investors who have fee-based advisory accounts. It may be possible for DIY investors to buy a Series F investment savings account – give it a try.
The day-to-day utility of savings accounts at alternative banks have been improved in recent years and many now offer no-cost bill payments and e-transfers. ISAs aren’t quite as flexible. If you need access to money held in one of these accounts, you’ll need to go into your brokerage account or trading app and enter a sell order. Expect cash in your account the business day following the trade. In the investment industry, they call this T+1 settlement.
Once the cash has appeared in your investing account, you’ll need to get it into your chequing account so you can direct it where needed. These transfers are easiest if you have a broker or trading app in the same corporate family as your chequing account.
ISAs are designed as a productive place to temporarily park cash in an investment account. But at today’s interest rates, they have broader appeal. Some investors have used them as a complement or replacement for bonds, which have been volatile in recent years. As a savings product, ISAs do not fluctuate in price.
One of the big benefits of ISAs is that they can be bought and sold in most cases without commissions. Similar products in the exchange-traded fund world offer slightly higher yields, but some brokers charge commissions of $5 to $10 to buy and sell ETFs.
ISAs can make sense in non-registered and tax-free savings accounts. Using an ISA in a TFSA shields you from tax on your interest income, but mind your withdrawals. Taking money out of a TFSA and then recontributing it in the same year puts you at risk of over-contribution penalties.