What kind of bank account do you need?

Everyday chequing, high-interest savings, tax-free savings - there are a dizzying array of bank accounts available. How do you know which type to use and for what purpose? Here are some basic tips from Chartered Accountant Brian Quinlan, a partner with Campbell Lawless Professional Corporation in Toronto.

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Open a chequing account for day-to-day transactions – “Use a chequing account to write cheques and for pre-authorized payments to pay for such things as utilities, your mortgage and subscriptions,” says Quinlan. “You can also use your chequing account to pay bills online and for cash withdrawals and other transactions at an automated teller machine (ATM).” Because there will likely be more activity in your chequing account, make sure you know what fees are being charged and how to minimize them. Open a savings account to put money aside – “Use a savings account to accumulate funds for planned purchases, such as holiday gifts or a vacation, or to take care of an upcoming tax liability,” advises Quinlan. “A savings account will usually pay a higher rate of interest than a chequing account, so any excess funds should not be left in a chequing account. However, make sure you maintain the minimum balance in your chequing account to avoid banking fees.” Take advantage of a tax-free savings account (TFSA) – “The TFSA is a relatively new type of account that allows individuals aged 18 and over to deposit $5,000 a year,” explains Quinlan. “Unlike regular bank accounts, any income earned on the funds in the TFSA is not subject to tax.” As well, funds withdrawn from your TFSA are not taxed and the contribution room is re-established so you can replace the withdrawal. “To avoid an over-contribution penalty, you must wait until the next calendar year to replace the funds in the TFSA,” cautions Quinlan. If you’re on the move, consider a foreign currency account – “If you do a lot of travelling to different countries, for business or pleasure, you may wish to have a separate foreign currency denominated bank account to avoid the commission costs of exchanging money and the potential losses if the exchange shifts against you,” explains Quinlan. “U.S. dollar accounts are the most popular foreign currency accounts in Canada. Some financial institutions even have special ATMs that dispense U.S. funds and charge your Canadian dollar bank account with the withdrawal, including the exchange rate and fees.” Consider whether you need multiple accounts – “Many savings accounts offer cheque-writing privileges, so you could get by with one regular savings account,” says Quinlan. “Before you go this route, however, find out what minimum balance is required to have no fees apply and what you will be charged if your balance drops below that level.” If you opt for a single account for your regular transactions, Quinlan suggests also opening a TFSA to earn some tax-free income. If you have more than one bank account at a single institution, make sure you have the ability to transfer funds from one to the other via online or telephone banking. Put a discipline check in place, and don’t let yourself access your TFSA online – in fact, many financial institutions will not allow electronic transfers in and out of any TFSA. Understand fees, service charges and account features – “You need to know how many transactions you plan to make each month so you can select the account that meets your needs while minimizing your banking fees,” advises Quinlan. “Find out what minimum balance you need to maintain to avoid fees and service charges.” Also be sure that you can access your account via ATM, online and telephone banking. Shop around – “Shop around for the financial institution and bank account that best meet your needs,” says Quinlan. “Don’t forget to factor in convenience, such as proximity to your location and hours of operation. As well, a credit union or smaller financial institution may offer a slightly higher interest rate than the big banks.” Brought to you by the Institute of Chartered Accountants of Ontario