What’s the difference between a HISA and a TFSA?
To be a good investor, it helps to have a solid understanding of the various tools you can access and when to use them. But that’s easier said than done, especially when investments and accounts all start to sound the same.
Consider, High-Interest Savings Accounts (HISAs) and Tax-Free Savings Accounts (TFSAs). Although these two-account have “savings” in their name, they offer two distinctive ways of saving your money. A TFSA is more than a savings account, it’s an investment account. Here’s a look at the different ways these accounts can play an important role in your financial future.
What is a HISA and is it the same as an investment account?
A HISA is not an investment account, it is a type of savings account that earns a higher rate of interest than standard savings accounts, but at a lower rate than what you might be able to earn on the markets. The annual percentage yield on these accounts varies by financial institution.
What are the pros of a HISA?
Your money is accessible – HISA don’t have contribution limits and you can generally withdraw your money more quickly.
Your money is safe – The Canada Deposit Insurance Corporation insures qualified HISAs for up to $100,000 per eligible account, per member bank.
What are the cons of a HISA?
You must pay taxes – The interest generated in a HISA is considered taxable income.
Contributions don’t lower your tax bill – HISA contributions aren’t tax deductible.
Your earnings will fluctuate – The interest rate on a HISA is variable, meaning you’ll earn more interest at some points than others. If interest rates begin to fall, these accounts may become less desirable over time.
Not ideal for everyday banking – You may be charged penalties if you use the account to make purchases, pay bills, make cash withdrawals, or receive payroll deposits.
How does a Tax-Free Savings Account (TFSA) work?
Although its also called a “savings account” the TFSA is a registered investment vehicle that allows any savings and investments you place inside of it to grow tax-free. But unlike a HISA that can only hold cash, TFSAs can hold cash as well as variety of investments like ETFs, mutual funds and more. It's worth noting that while many TFSAs are investment accounts, some may offer interest on balances maintained within the account like a HISA.
If you’re 18 years of age (or older) and hold a valid social insurance number, you’re eligible to open one of your own. The Canada Revenue Agency (CRA) determines how much money you can contribute every year – and that available contribution room accumulates each year. If you need to take some out, you don’t lose that contribution room – you just must wait until January 1 of the next calendar year to get back that contribution room.
What are the pros of a TFSA?
Your money grows tax-free – Any money or investments held inside your TFSA (including investment income and capital gains) grows tax-free.
You can withdraw your money at any time – If you pull money out, you don’t lose that contribution room, you just must wait until the next calendar year to reinvest.
The account can meet multiple financial goals – A single TFSA can hold your savings and investments, making it a good option for both short- and long-term goals.
What are the cons of a TFSA?
Your contributions are limited – The CRA determines the amount you can contribute on a yearly basis. If you exceed this amount, you will be charged a 1% penalty per month on the overcontribution (for as long as it remains in your account).
Not all investments qualify – The CRA limits the types of investments you can hold in a TFSA. For example, you can’t hold cryptocurrencies directly, but you can buy Mutual Funds and ETFs that provide exposure to stocks, bonds, alternative assets, cryptocurrencies and more.
Creditor protection is limited – Eligible deposits (such as cash and GICs) inside a TFSA receive creditor protection of up to $100,000 per eligible account, per member bank, but stocks, bonds and mutual funds do not.
Contributions don’t lower your taxable income – The money you put into a TFSA does not reduce your taxable income (or increase your potential for a tax return) like an RRSP does.
Which account is best for you, the TFSA, the HISA or both?
Many people have both TFSAs for their investments and HISAs for their savings. Simply understanding how both can work for you is the best way to begin building toward your financial goals. Its important to remember a TFSA is more than a savings account, it’s an investment account. If you are eligible consider opening a TFSA as the process is easy. Talk to your financial advisor about using Fidelity mutual funds and ETFs in your TFSA today!
