High-yield savings account in Canada: how does it work?

High-yield savings accounts earn higher interest than traditional savings accounts. Too good to be true? Find out more about high-yield savings accounts in Canada

High-yield savings account in Canada: how does it work?

In today’s era of unpredictable economic uncertainty, many of us are exploring ways to produce more income. Whether it is a side hustle, gig, investment or business, anyone would push through it to earn more in the hope of saving finances that can be used for much bigger and important things.

Speaking of savings, did you know that the bank and type of savings account you have can impact the overall value of your finances? That is why it is critical that you pick one that will be effective in managing your hard-earned money.

A type of savings account that offers higher interest rates vs. traditional savings accounts is called a high-yield savings account.

What is a high-yield savings account?

Just like any traditional savings account, a high-yield savings account has the same functions; however, what sets it apart is the ability to earn higher returns on your deposits.

The higher return on your deposit is called the "high yield" element. This is the main reason why it is appealing to consumers, especially to those who are looking to optimize their savings.

Pros and cons of a high-yield savings account

It is true that a high-yield savings account provides higher returns on your deposited finances. But that shouldn’t be the only deciding factor.

To help you make an informed decision, let’s go over the advantages and disadvantages of having a high-yield savings account:

Pros of a high-yield savings account

Competitive interest rate

High-yield savings accounts are known for their interest rates that are typically much higher than those offered by traditional savings accounts. This means that your money increases quickly over time, which allows you to maximize savings and reach your financial goals sooner.

Accessibility and security

High-yield savings accounts in Canada are offered by an authorized financial institution that ensures the safety of your finances.

You can usually withdraw your savings with no restrictions. A high-yield savings account is a good option for your emergency fund or short-term financial goals.

No lock-in period

Compared to any other investment options on the market, high-yield savings accounts do not have a lock-in period. You are free to move your savings elsewhere if you change your financial goals or find a better investing opportunity.

Minimal risk

Savings accounts with high yields are considered low-risk investments. Even though they can provide a high return value like stocks, high-yield savings accounts have the advantage of guarding your money while earning interest.

CDIC insured

As mentioned above, high-yield savings accounts are offered by authorized financial institutions. In addition to this, the Canada Deposit Insurance Corporation (CDIC) insures eligible transactions of CDIC members of up to $100,000. This gives you an additional layer of security and assurance.

Cons of high-yield savings account

The above points state the advantages of high-yield savings accounts. Here is the downside:

Return on investment is limited

Although high-yield savings accounts outrule regular savings in terms of interest and returns, they still fall behind higher-risk investments like stocks or mutual funds.

Changing interest rates

While high-yield savings accounts offer high interest rates, these can be inconsistent. There is still a chance that your interest earnings may fall, given that the market conditions are changing over time.

Fees that could be charged

High-yield savings accounts can be expensive because of their fees. Withdrawal and maintenance fees are a thorn in the side of many high-yield savings account users, so review the terms and conditions carefully.

Risk of inflation

High-yield savings accounts offer high interest rates, no question. But are the interest rates high enough to beat inflation? With the economy and inflation in flux, your savings may lose purchasing power. This could, in the end, affect your financial goals.

Considerations for taxes

When a high-yield savings account earns interest, it is subject to tax. Even though the charges for tax will depend on your bracket and current tax laws, this can still affect your overall gains.

What bank has the highest savings interest rate?

Several banks stand out when it comes to offering the best savings interest rates in Canada.

These banks have earned their reputation for providing good services and competitive rates. Let us get to know more about them in detail:

Simplii financial - high interest savings account

Simplii Financial is a CIBC-owned online bank that provides savings and checking accounts, credit cards, mortgages, loans, credit lines, registered plans, Guaranteed Investment Certificates (GICs), and mutual fund accounts.

Simplii's no-fee HISA (high interest savings account) gives account holders access to CIBC ATMs throughout Canada.

Scotiabank - MomentumPLUS savings account

Scotiabank, founded in Halifax in 1832, is one of Canada's oldest and largest banks and a member of the country's Big Six financial organizations.

The MomentumPLUS Savings Account pays a greater rate of return on long-term savings for several goals in one account.

RBC - high interest eSavings account

The Royal Bank of Canada (RBC) has been part of Canada's Big Six bank since 1869, which provides banking, investing and lending solutions to businesses and individuals. The bank’s high interest eSavings account has no minimum deposit requirements and provides free e-transfers any time.

Read more: Royal Bank of Canada’s mutual funds: what you need to know

Canadian Imperial Bank of Commerce (CIBC) - eAdvantage savings account

CIBC is a full-service global financial organization and one of Canada's Big Six banks. The eAdvantage Savings Account can earn a healthy regular interest rate of up to 1.80%, which can be increased to 5.60% with bonus interest and Smart Interest, a benefit that could reward you for saving at least $200 per month.

Tangerine - savings account

Tangerine is a Scotiabank subsidiary that provides checking and savings accounts, GICs, registered accounts, credit cards, mortgages, loans, and investment products.

Tangerine's promotional 5.25% interest rate gives you a high rate of return over the course of five months. To maximize your financial goals, combine it with the virtual bank's no-fee checking account, credit card, registered accounts, or GICs.

KOHO - spending and savings account

KOHO is a virtual bank that also provides prepaid VISA cards with cash back. Depending on the subscription plan chosen, this hybrid checking-savings account earns up to 2.00% interest on savings and up to 2.00% cash back on purchases.


Should I consider opening a high-yield savings account?

Considering whether you should get a high-yield savings will depend on your goals.

Here are some factors to consider before you get a high-yield savings account in Canada:

Account types and options

The most common choices are savings accounts, money market accounts, and certificates of deposit (CDs). Each account type has its benefits and downside. Your choice should align with your financial goals and risk tolerance.

Annual percentage yield (APY) and interest rates

The Annual Percentage Yield (APY) dictates the entire interest that you will be earning for the whole year, including the compound interest.

If you want to have a higher APY, do your research; compare what is offered by the different banking organizations.

Requirements for a minimum deposit

Some of the high-yield savings accounts in Canada require a minimal initial deposit. The deposit amount varies depending on the account type and bank. Choose an account with a minimum deposit requirement that matches your available funds.

Access to funds

During your planning stage, find out what the process is for withdrawing funds from the high-yield account. Withdrawal limits may apply to some accounts, while others provide greater flexibility. Assess your liquidity needs and choose an account that meets your financial demands.

Term length for Certificate of Deposit (CD)

When choosing a Certificate of Deposit (CD), do not forget to examine the term duration. CDs often provide greater interest rates but require you to keep your money locked up for a set length of time. Check that the CD term corresponds to your financial goals and timetable.

Banking via mobile and online

Convenience is important in the digital age. Examine whether the financial institution provides effective online and mobile banking services. These services enable you to manage your high-yield account, track transactions, and check your balance from the comfort of your own home or while traveling.

 

Bearded man in a beanie and jacket with bank card in one hand, mobile phone in the other

Customer reviews and reputation

Before opening a high-yield account, look into the financial institution's reputation. Customer feedback and ratings can truly reveal information about the quality of customer service, the online experience, and general satisfaction.

Compliance with regulations

Financial regulations protect the banking system's stability and integrity. Make sure that the financial institution is regulated by appropriate authorities and adheres to industry norms. By doing this, you can be assured that there is an additional layer of protection for your high-yield account.

Considerations for inflation

Although high-yield accounts provide appealing interest rates, it is critical to consider inflation. Sooner or later, inflation can decrease the purchasing power of your money. So before you open a high-yield savings account, see if there’s potential for the interest rate to outperform inflation. This is the way to achieve true financial growth.

 

Additional products and services

Some financial organizations combine high-yield accounts with bundled products and services. These could include tools for financial planning, investment possibilities, and more.

Although these add-ons are tempting, ask yourself: are they worth getting? Are they aligned to your financial objectives?

Effects on taxes

Taxation applies to interest earned from high-yield accounts. It is your responsibility to understand the implications of the account type you aim to have. Better yet, consult with a tax expert.

Economic conditions

Interest rates and the overall success of your high-yield account might be impacted by the economy. Do not let yourself get behind economic developments. Modify your strategy whenever needed.

Diversification

Diversification is important, even though a high-yield account may be a helpful addition to your financial strategy. A high-yield account may or may not fit into your larger investing plan.

Goal setting: long-term vs. short-term

The best high-yield account depends on your financial objectives. Decide if your objectives are long-term, like saving for retirement, or short-term, like putting money aside for a vacation.


Considering different offers

It is not a clever idea to accept the very first offer you encounter. It is best to spend some time analyzing various high-yield account choices before signing. Doing this will help you find the best conditions, costs, and features.


Reviewing and monitoring

Your quest does not end when you open a high-yield account. You must review your financial objectives and the performance of your account on a regular basis. Stay on track or make any changes when necessary.

The availability of ATMs

You can reduce your withdrawal costs by having access to fee-free ATMs. Consider how easily accessible the ATMs are at the banking institution you have chosen.


Withdrawal penalties

For some high-yield accounts, early withdrawal fees apply. To prevent unforeseen costs, familiarize yourself with the withdrawal penalty.

Future versatility

You might think of changing your financial goal at some point. When this happens, you might need to change to a different account that will be suitable for your needs. It’s a good idea to choose a high-yield savings account that is flexible enough to adapt to your needs.

 

Analyzing the details

Before you make any decision, study and understand the high-yield account's terms and conditions carefully. Do not miss any provisions that could affect your profits or account management that should be carefully read.
 

Can I trust a high-yield savings account?

A high-yield savings account pays a higher interest rate than a traditional savings account. This can help you grow your savings faster, but there are disadvantages. The interest rates might not be enough to offset inflation, and the fees might be high.

In the end, it’s important to weigh the benefits against the drawbacks, assess your risk appetite, and see if getting a high-yield savings account meets your financial goals.

If you found this article helpful, read and bookmark Wealth Professional to get insights and latest news about taxation, investment, retirement, and other finance matters.

Do you think that opening a high-yield savings account in Canada is a good way to save? Let us know in the comments below:

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