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Is Saving in Your TFSA That Important?

If you’re saving for a long-term goal, you’ll want to think about where to keep your money. Particularly if your savings goals involve thousands of dollars, it’s important to choose the right account to maximize the amount of interest you’ll earn and to make sure you lose the least amount of that interest to taxes.

This blog post is sponsored by Alterna Bank.

Sure, the act of actually budgeting and contributing to your savings goals is the hardest part, and if you’re killing it on that front, you’ve already won 90% of the battle. But don’t slack off now and let your money sit in a low interest savings account, especially not one with *dun dun* monthly fees. Make your money work for you by choosing the right account for it to grow and get you to your goal sooner.

Choosing a High-Interest Savings Account Over a Regular Account

The first aspect to consider when deciding where to park your long-term savings is the interest rate your money will earn. You aren’t going to earn spectacular returns on a savings account, but you should be able to secure a rate in the range of 2%. For example, Alterna Bank offers a TFSA savings account earning 2.35%*. In comparison, a standard savings account at one of the big banks may only offer 1.05%.

The difference of 1.30% might not seem huge, but it adds up over time. If you are saving for a large savings goal like a house down payment, that 1.30% interest is going to make a significant difference in the dollar value of the interest you’ll earn every month.

For example, if you are planning to save $30,000 for a house down payment, the table below outlines the difference in the earn you’ll earn per month in the two accounts as you approach that goal:

Account BalanceInterest Earned
Alterna Bank @2.35%Big Bank @1.05%

The difference between the two columns is significant, especially at those higher balances. If it takes you several years to accumulate your down payment, those extra dollars earned could boost your balance by hundreds of dollars.

A Note About Introductory Periods

Let’s take a quick moment to talk about promotional interest rates. Many banks are currently advertising savings account interest rates higher than 2.35%.

In most cases, those advertised interest rates are for a promotional period, and once that period is over, your money is subject to a lower interest rate. If you’re considering moving your money to a bank that is advertising a high rate, make sure you read the fine print. In some cases, the high interest rate is only available for a specified period, or is only available on new deposits, etc.

If you are planning to save money over the long term, look for a savings account that delivers a consistently high interest rate. Unless of course chasing promotional interest rates is your thing. In that case, you do you.

Tax-Free High-Interest Savings Accounts vs Standard Savings Accounts

While choosing a savings account that will earn you higher interest is important when saving for long-term savings goals, there is one catch to earning all that extra interest: you have to pay tax on it.

Every year that you have money earning interest at a financial institution, your bank will send you a “Return of Investment Income” slip, aka your T5. When you file your income taxes, you’ll need to report the interest you earned as income, and like all income, you’ll pay tax on it.

If you’ve got your money parked in a high-interest savings account earning hundreds of dollars in interest, you may pay a significant amount of tax, which also reduces the value of a higher interest rate.

Using a Tax-Free Savings Account to Maximize Your Interest Earned

Fortunately, you can eliminate the tax you pay on interest earned by stashing your savings in a Tax-Free Savings Account. A Tax-Free Savings Account is just that, tax-free. I won’t go into the ins and outs of a TFSA today, but check out this great resource if this is the first time you’re hearing the term TFSA.

Many TFSAs that offer competitive interest rates, like Alterna Bank’s 2.35%*, which, on top of being a competitive interest rate, doesn’t charge monthly fees. Because we all know how I feel about fees. Avoiding the tax penalty on savings goals gets you to your goal sooner, so it’s essentially a no brainer to choose to stash your money in a TFSA.

When Does a TFSA Not Make Sense?

There are a few specific situations where you shouldn’t use a TFSA for long-term savings, like if you don’t have enough contribution room, or if your tax bracket means that you should be prioritizing your TFSA contribution room for retirement instead of savings goals. But for the most part, putting your long-term savings in a TFSA is an easy way to maximize the interest earned and keep more of those bonus dollars in your pocket.

Are you using a TFSA to save for a long-term goal? I want to know!

*Interest is calculated daily on the closing balance and paid monthly. Interest rate is annualized and subject to change without notice.


  1. Canadian_Sadie says:

    I like to utilize the TFSA in conjunction with my mutual funds. Not only does it offer a great additional savings vessel, but the money inside that TFSA grows tax-free, because it goes in after-tax. I.e. when you withdraw it (presumably down the road–I’m planning on retirement age) there are no taxes to be paid on the funds, and no taxes to be paid on the growth. The money deposited now goes in after taxes have been paid, and for most people their current taxation rate will be the lowest it will be in their lifetime, as most people will have raises, promotions, and save more over their future years.

    I LOVE my TFSA.

    • Jordann says:

      One of the caveats I mentioned above was using your TFSA to invest, which is also an excellent use of your contribution room.

  2. ab says:

    Can you transfer directly from the TFSA to your external bank account? Or do you need to open an Alterna chequing account as well?

    • Jordann says:

      That is a good question! I imagine, like most other online banks, you can directly link your external chequing account and make transfers directly, without having to open an intermediate chequing account.

  3. Well, it is just for savings. It should not be seen as investment. If I want to invest, I will look for assets they can yield high returns.

  4. Hi – I have a very weird question regarding a TFSA. LOL
    Is TFSA pronounced teef-sah or is it just a matter of saying the letters?
    My Dad insists it’s teef-sah and I’m not sure…
    Thanks all, and thank you more importantly for an awesomely written piece!

    • Jordann says:

      That is such an original question! I pronounce every letter, and that’s how I’ve always seen/heard it pronounced.

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