Best TFSA Rates – Interest Rate Review #2

{6 Comments}

I keep my Tax Free Savings Account (TFSA) money in cash. It’s actually kind of embarrassing. How can I hope to get decent TFSA rates of return if I scatter my money among meager vessels of usury? (Spoiler: my average return, in savings accounts and a guaranteed investment, is about 3.5%!)

[Check out the Best Savings Account Rates Over at RateSupermarket!]

That’s right. I don’t have my TFSA in equities. I don’t hold a high yield junk bond fund. Not even a low-risk AAA debenture.

Despite my extremely low-risk approach, I think my TFSA rates of return are reasonable. What the heck do I have my money in?

Best TFSA Rates - Interest Rate Review

At the end of 2011, my TFSA rates and holdings were as follows:

  • 2% on $10,000 (plus accumulated interest) in a “high” interest savings account at Ally Bank.
  • 5% on $5,000 (again, plus accumulated interest) in preferred shares from my credit union. For some reason, the income from my preferred shares would be treated as interest rather than a dividend (if it were held outside a TFSA). I consider this investment to be “cash”-like. I’m allowed to pretty much redeem it at will — the interest rate, which we’ll discuss in the next paragraph, is crazy good. I think the credit union needed money to acquire or build a new branch so they paid a big premium to get capital. Interest rates have remained so low, I think they want to offload these shares for cheaper financing.

Hence I had all of my TFSA in cash or near-cash accounts with financial institutions. A quick calculation based on my TFSA rates shows my portfolio yield is 3%. The actual effective yield was a bit lower because I’d accumulated more interest on my cash savings (contributed in 2009 and 2010) than on the credit union shares (which I bought with my 2011 contribution room). I’d tell you the precise portfolio yield, but I’m doing this from memory rather than looking up my exact portfolio holdings as of December 31st, 2011. The individual TFSA rates, however, are correct.

To me, an overall yield of 3% is not bad. If I were paying taxes on that 3%, it’d reduce the yield a lot. Interest income is taxed more heavily than dividend income. But these securities are in a TFSA, so they’re tax-free. To me, it’s more efficient to keep equity investments in taxable accounts where I’ll enjoy the slightly-discounted tax rate on capital gains and the immensely lower tax rate on dividends.

Early this year, I was spurred to seek out the best TFSA rates and improve my returns. There were two catalysts:

  • I had $5,000 in additional contribution room as of January 1st. If I put this $5,000 in my Ally account, my overall portfolio yield would drop from 3% to 2.75%. I held my nose and did it, since it was better to earn 2% tax-free on $5,000 than 2% in taxable interest — at least until I could find a better rate. I was lazy and left all $15,000 (plus interest) with Ally for a while.
  • One of my TFSA rates changed at the end of March. Ally dropped their TFSA rates (and their rates for other “high-interest” savings accounts) to 1.8%. Considering Ally loans out savers’ money in the form of high-margin products like car loans, I found the spread to be disgusting.

The quest commenced. The best TFSA rate on a cash account offered by a CDIC-insured institution that I could find was 3% from Canadian Direct Financial (CDF). It wasn’t one of the best TFSA rates, it was the best. If anybody has found better, please share it.

[Check out the Best Savings Account Rates Over at RateSupermarket!]

I’m kind of embarrassed to say that I didn’t act on my find for two months. I could give excuses like “I was busy,” but the truth is that I am a fallible, sometimes money-stupid, procrastinator. My money was exactly the same, whether it was at Ally or CDF. The only difference was how hard my money would work for me. Even worse, the extra 1.2% that I could have earned for those interim months would have been tax-free. But I did it, and I’m not earning 3% on about three quarters of my TFSA portfolio. Here’s the new allocation:

  • 5% on my credit union preferred shares (about one quarter of my TFSA portfolio)
  • 3.04% (3% per annum, because it’s compounded monthly) on my CDF high-interest savings account

That means that my overall TFSA portfolio yield is about 3.53%. Earning over $700 a year, tax- and risk-free isn’t too bad. Sure, I could make more in the markets – but I could also lose more. I’m much less scared of a taxable investment taking a dump — it wouldn’t affect my contribution room for a tax-sheltered savings vehicle if the investment went to 0 or if I had to sell the investment and thus realized the loss. Further, I have a pretty efficient setup from an income tax perspective. Finally, I kind of like the idea that I could cash it out at any time – even though I’d be loath to do it.

What do you think? Is 3.53% OK given today’s abysmal TFSA rates? Am I stupid to keep my TFSA money in low-risk, low-return investments?

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6 Comments… Share your views

  1. Wow I really need to do my TFSAs.

    • If you’ve never made a TFSA contribution in your life, then get started — there’s nothing to lose if you put it in a cash account (you can always decide to get higher-paying assets later).

      1) Figure out your contribution limit. Right now, you get $5,000 a year in contribution room. This annual will increase (likely to $5,500 for 2013). If you turned 18 at any point during or before 2008 (and haven’t contributed anything) then you can probably contribute up to $20,000.
      2) Open an account with CDF, since they’re paying 3% (although make sure this doesn’t change before you open the account!!). Also, call them up beforehand to negotiate — if you want to close your TFSA, they’ll charge you $50 but you can negotiate to eliminate this BEFORE you open the account. As I told them, they have NOTHING to fear if they keep the most competitive rate; and if their rate drops below the highest then they KNOW I will leave. I won’t leave angrily if they don’t try to trap me. If they try to charge fees, that’s trapping me. I come and go as the winds of interest rates blow.

  2. People’s Trust is fine too… but they lack the online presence.

    BTW… I believe that your TFSAs are like RSPs… and are insured to whatever value against bank failures…. but yea, not against a bubble popping and the market rocketing down.

    >>
    http://www.youtube.com/watch?v=5uASQgLwaIs
    Honestly lol.
    I wish we’d bought gold!
    I think that this must be the doomsday music that crazy yukoner likes. Honestly enjoy.

    • Nice. I saw those guys during my search (I love their splash page. Two guys in large suits looking super awkward). As you note, their rates are comparable to CDF (0.1% less on general savings, and the same rate as CDF on their TFSAs) but their accessibility sucks in comparison. I’ll note that CDF’s money transfers are not as convenient as Ally but it’s good enough. If CDF drops their TFSA rate I will probably make the jump (only with the TFSA) over to People’s Trust.

      Great vid. That guy’s life would have been way better if he’d had a bunch of gold to carry with him just to buy bread.

  3. Joe, I transferred $10 000 from my ING TFSA to CDF, just before the latter dropped its interest rate from 3% to 2.55%, but now I’m stuck at CDF for another 6 months, because of their policy to charge a transfer fee, should you quit prior to having been there for 12 months. Regardless, 2.55% is better than ING’s 1.4%.

    • I know the feeling! I did the same with my TFSAs (besides what I have in a credit union’s preferred shares).

      I would move as soon as the transfer fee clause ended — if I found a better rate somewhere. I haven’t, except at People’s Trust where I’m concerned about my money getting trapped behind worse transfer-out terms and the complexity of stone age banking.

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