[Do you convert more than $10k from USD to CAD or vice-versa annually? If so, read below for tips to save hundreds or thousands of dollars on currency conversion fees.]

Some people don’t realize it, but banks make quite a bit of money with currency exchange, with some of them charging you over 3% of the amount you convert. Assuming you have $10,000 to convert, this means over $300 in fees for a single transaction. Fortunately, not all banks charge as much, and there are other options where you can pay as little as 0.01% of the amount converted. See below for a discussion of these options.

First option: banks

By default, people will look to their bank to do their currency conversion. Here’s what their spreads (difference between the rates at which they convert USD to CAD and the one at which they convert CAD to USD) were on 2012-11-05, along with the amount you’d give them just to have them convert $10,000 USD to CAD.

It turns out that if you want minimum hassle and don’t convert money that often, ING Direct is a good choice. It’s very easy to open a business or personal account online, and you can deposit cheques by simply writing your customer and account numbers on them and mailing them to ING Direct. It’s not as convenient if you need to receive wire transfers in USD, as they don’t allow that, but you can have a USD bank account at regular bank, link it with your ING Direct account and transfer funds to do the currency conversion at ING Direct.

Second option: forex brokers

Some businesses specialize in currency conversion and differentiate themselves by offering better rates than the banks do, among other things. While reading on the subject, I came across Knightsbridge FX and XETrade. Their spreads usually vary between 1% and 2%, which means that you’d lose $50-$100 to spread to convert $10,000. You also need to pay a wire transfer fee (approx $20) to fund your account with Knightsbridge, but it’s still a nice improvement over what you’d pay banks.

Third option: Interactive Brokers

Interactive Brokers is a trading platform that lets you convert currencies and which can be linked to both USD and CAD-denominated bank accounts based in Canada. They have a minimum monthly fee of $10, but their fee for currency conversions is hard to beat: 0.01%, with a $2.50 minimum. This means that any amount under $25,000 can be converted for a flat $2.50 charge.

With that said, IB is not for everyone:

• They have fairly lengthy paperwork. I estimate it took me 3-4 hours to set up the account.
• They require a $10,000 minimum deposit to open an account.
• Their $10 minimum monthly fee means it makes no sense to use them if you’re going to save less than $120 per year in fees with them.
• Their tools are designed for traders and can be confusing for laymen, especially at first.
• If you fund your account via EFT to save on wire transfer fees, you cannot withdraw the funds to a different bank account (e.g. to your CAD account if the funds came from the USD account) for 45 business days, or approx. 2 months*.

If you don’t mind these limitations, however, they can be great. If you have $50k to convert in a year, I estimate that Interactive Brokers can save you $1,180 compared to doing currency conversions at RBC and $605 compared to doing them at ING Direct. Not that bad for a 4-hour account setup and maybe an extra 2 hours to get familiar with the tools…

* They have cheap commissions on stock purchases, though, so you can buy some bond ETFs like XBB while waiting for the hold to expire to withdraw funds to your bank account.

My setup

I get payments from US clients both by wire transfers and by cheques.

I have a business USD account at RBC and maintain a $2,500 balance to avoid the $9 minimum monthly fee. Wire transfers and cheques are deposited in that account.

That account, as well as my CAD account, is linked with my Interactive Brokers account so I can move money between them via EFT.

When I need to convert money, I transfer it from RBC to Interactive Brokers, convert it to CAD there, and send it to my CAD bank account once the hold period expires. I sometimes buy stocks with the CAD funds while waiting for the hold to expire.

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This is the best setup I found for my situation, but as noted above, the best solution depends on your needs. If you have questions or would like more information about the options above, feel free to let me know in the comments.