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Showing commendable good sense, customers of ING Direct have been asking lots of questions about the 3-per-cent interest rate the online bank is offering on tax-free savings accounts.

"A good percentage of the calls at our call centre last week were customers asking because they were worried we were going to do a bait-and-switch on them," ING Direct Canada chief executive Peter Aceto said on Monday.

You know the drill: A bank offers a temptingly high interest rate on a TFSA or regular high-rate savings account and then chops it back after a few months pass. Understanding how offers like these work is essential, because 58 cents of every dollar invested in TFSAs were held in savings accounts as of June 30, according to industry figures supplied by Mr. Aceto.

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ING's 3-per-cent TFSA rate compares with 1.2 per cent for its regular investment savings account. So when is that TFSA rate going to fall?

Mr. Aceto said the bank is trying out a policy of offering different rates for different types of savings products and has not decided when the 3-per-cent deal will end.

"It is going to drop, there's no question about it," he said. "But we went out of our way not to make this a promotion."



Investor Education: TFSAs

  • TFSA or RRSP: How to choose?
  • Note to Flaherty: TFSAs are good but they can be so much better
  • Using a TFSA can help get retirement plans on track
  • The right way to use a Tax Free Savings Account
  • Learning from TFSA's rule book




At some point in the year ahead, the interest rates guiding savings accounts are going to rise from their historically low current levels. For now, though, banks are in the position of trying to attract TFSA savings with rates that, without any special deals, are laughably low.

If you're looking at one of those special deals, be sure you understand the details. For example, Canadian Imperial Bank of Commerce is offering a 2-per-cent rate for new balances, which is built on 1-per-cent regular interest and 1-per-cent bonus interest. Read down in the fine print and you'll find that the bonus rate applies until April 30.

At Bank of Nova Scotia, a footnote to an ad tells us that the bank has been paying 2 per cent on TFSAs since Sept. 23. So there's some longevity there, even if the fine print says the rate is subject to change at any time.

HSBC Canada is offering 1-per-cent bonus interest on top of its regular TFSA savings account rate of 0.8 per cent. The combined 1.8-per-cent rate was made available in November and extends to March 12.

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For a twist on the teaser interest rate for TFSAs, check out the offer from Toronto-Dominion Bank's TD Canada Trust branches for a five-year, stock-market-linked GIC with a minimum return of 6.5 per cent. That's a total return, you'll read in the fine print. Annually, this GIC will make at least 1.3 per cent.

. Weigh in on whether you would stash some extra money into an RRSP, RESP or a TFSA.



People with credit card balances have been known to jump from credit card to credit card to take advantage of introductory low interest-rate deals. It's questionable whether you should do something similar to benefit from teaser rates on TFSAs.

Let's say you put the maximum $5,000 into an ING tax-free savings account at 3 per cent on Jan. 1. Each month, that return gets you an additional $7.50 in interest over the regular ING rate of 1.2 per cent.

If ING were to lower its rate, you face the choice of keeping your TFSA there or seeking better returns elsewhere. It happens that ING doesn't have any fees for transferring out of a TFSA, but you may run into this elsewhere. (In fact, ING's research shows that charges of $15 to $50 aren't uncommon when transferring a bank TFSA.)

Here are two alternatives to taking a teaser rate on a TFSA savings account. One option is to find a bank offering high rates on a regular basis, not as a promotion. An example is Ally Canada, which has paid 2 per cent on its online savings account since it opened for business last September and is offering the same on TFSAs.

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The other option is to think about investments for your TFSA other than savings. TFSAs make a fine home for an emergency fund or for savings aimed at buying a house or car. If you're able to take a longer-term approach, then it's worth considering investments that can reap you higher returns than savings accounts.

Blue-chip dividend stocks, preferred shares and corporate bonds all potentially offer yields in the 3 to 5 per cent range, though they could fall in price if interest rates move higher. Long term, though, you're going to do a lot better than 2 or 3 per cent for a few months.

Saving money with TFSAs

Savings accounts are a popular place to put contributions to a tax-free savings plan. Here's a survey of financial players offering premium rates on TFSAs.



Bank

Rate

Notes

Ally Canada

2%

The same rate as on Ally's regular savings account

CIBC

2%

Includes 1% bonus interest paid until April 30

HSBC Canada

1.8%

Includes 1% bonus interest paid until March 12

ING Direct

3%

Compares to 1.2 % for ING's regular savings account; subject to change at any time

Scotiabank

2%

Subject to change at any time

Source: Bank websites

Follow me on Facebook. I'm at Rob Carrick - Personal Finance.

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