I’m not exactly early to the party but I’m now researching my Tax-Free Savings Account (TFSA) options and looking to shelter part of our emergency funds in a TFSA. Since the funds must be readily accessible, the TFSA would either be a high interest savings account or hold cashable GICs, which rules out self-directed or investment TFSA accounts (see earlier post on Which Tax-Free Savings Account?).
Ideally, I would like to open an account with my main bank (Royal Bank) but RBC’s TFSA is relatively unappetizing – while there are no administration fees or withdrawal fees and the savings account pays a relatively solid 0.75%, the redeemable GICs pay a paltry 0.05% for a 1-year term with an early redemption rate of 0.03%. I don’t know why RBC even bothers selling these GICs: on a $5,000 investment, RBC’s redeemable GIC would pay an interest of $2.50 if it is held for the entire term – just enough to buy two sticks of chewing gum.
Other banks are hardly any better. TD Bank and Scotia offer a slightly higher rate of 1% on a savings account but it is difficult to find information on fees on their website. BMO also offers a 1% rate on a savings TFSA and doesn’t levy any administration fee, withdrawal fee or transfer fee. CIBC’s savings account offers a 0.75% interest rate and charges no admin fee or withdrawal fee but transfers cost $100. President’s Choice TFSA isn’t very attractive either: a 0.75% interest rate and a $50 transfer fee.
After looking at RBC’s offering, I narrowed down the list to three options:
Outlook Financial, a Manitoba-based credit union, offers a High-Interest Savings Account with an attractive 1.50% interest rate and some of the best cashable GICs around. For instance, the rate on a 5-year cashable GIC (a minimum investment of $1,000) is 3.85% with a 2% interest rate for early redemptions. There is a catch though: Outlook Financial does not offer CDIC coverage. Instead, insurance is provided through the Credit Union Deposit Guarantee Corporation.
Once again, ING Direct has a very strong TFSA offering: a high interest savings account with a 3% interest (until October 1, 2009) that will probably change to 1.2% thereafter. The rates on GICs are also very attractive: 3% on a 5-year GIC with no minimum investment and an early redemption rate of 0.5%.
The TFSA from Canadian Tire Financial Services is also attractive with a 1.5% high interest savings account and cashable GICs. The website is not very clear on the early redemption rate only saying: “you will instead receive interest on the redeemed amount at the early redemption rate that we then pay on GICs of the same term”. Both ING Direct and CTFS have CDIC coverage.
I’m leaning towards ING Direct because I already hold an account with them and their offering isn’t markedly different from Canadian Tire. I’m planning to keep the TFSA contributions in a savings account for now and build a laddered GIC portfolio of 1 to 5 years at a later date. This topic was also posted on the Canadian Money Forum.
