“What is a GIC and how do they work” is a common question for many people who are looking to become investors. When opening up an RRSP, RESP or a TFSA, one of the wisest ways to use these accounts is to combine it with an investment vehicle. There are several different options available when investing money and these investment methods vary in difficulty and in risk. Investments such as mutual funds, GICs, bonds, stocks and ETFs are some of the options to use to drive your investments. This being said, the safest and easiest way to invest your money is to open a Guaranteed Investment Certificate (GIC). This blog will cover what a GIC is, types of GICs, rules about GICs, pros and cons of a GIC and more.
What is a GIC?
A GIC (guaranteed investment certificate) is a low-risk investment that is safe and secure. Since it is guaranteed, you don’t have to be concerned about losing your money, as the principal amount of your investment will always be guaranteed to be returned to you when the investment matures. If you deposit money into a GIC and receive interest on that money, it functions similarly to a savings account. The GIC is not a self guided investment either, which makes it easier for you to just create one and forget about it. This is really helpful because the financial institution will not tax you if your GIC is used with a TFSA, otherwise income made on the GIC through an RRSP or a non-registered savings account will lead to the income made on your investment being taxed.
The distinction is that a GIC account requires you to hold your funds for a predetermined amount of time. Depending on the type of GIC you own, you might have to pay a penalty if you take it out early. The time range to hold your money in a GIC can be as short as 30 days to 10 years.
Types of GICs
There are also several rules surrounding the GIC whether it is non-redeemable, redeemable or cashable. Let’s take a look at the differences:
An investment choice that offers higher interest rates for locked-in investments is a non-redeemable GIC. These investments are less liquid than cashable or redeemable GICs. Your money is completely locked away for the entire duration once you select your predetermined time frame or term. You have two options when your non-redeemable GIC matures: you can either renew the GIC so that the money keeps growing or you can withdraw the funds along with the interest that has been accrued.
Pros of non-redeemable GIC:
Extremely low-risk investment opportunity
Greater interest rates than GICs that are cashable or redeemable
A wide variety of terms are available (typically 30 days to 10 years)
Cons of non-redeemable GIC:
Lacking liquidity and unable to access money until GICs mature
Penalties will apply if the contract is broken, which is very difficult to do.
Redeemable GIC or Cashable GIC
Both options are flexible and let you withdraw your money before the GIC’s term expires, which is how cashable and redeemable GICs compare. The majority of cashable GICs have a brief (30–90 day) locked-in period before you can access the money without incurring any fees. There is no waiting period for redeemable GICs, so you can take cash out whenever you want.
The interest you’ll receive if you withdraw your money before the term is up is another difference. Generally speaking, a cashable GIC generates interest while you hold it. As a result, if you have a one-year cashable GIC and redeem it after eight months, there won’t be any penalties; you’ll just get your interest back. With a redeemable GIC, you could do the same, but you would be subject to the bank’s early-redemption rates, which are typically much lower than the rate you’d get if you waited out the entire term.
Pros of redeemable GIC or Cashable GIC:
Short time locked-in period before access to money.
There is no early withdrawal fee.
Extremely low-risk investment which is guaranteed
Cons of redeemable GIC or Cashable GIC:
Lower rates of interest than those on a lot of other investment vehicles
If you withdraw funds before the locked-in period has ended, you will forfeit any interest gains.
There are also non-registered GICs and registered GICs, this is an important thing to know when considering taxation. There are some great ways to reduce the impacts on taxes on the income made on your GIC but with that being said, sometimes you will be required to pay taxes on the income made on your GIC, this depends on if your GIC is non-registered or registered.
With a registered account, your GIC can grow your savings tax-free because it is registered with the Canadian federal government. The following are registered accounts:
- Tax-free Savings Account
- Registered Retirement Saving Plan
- Registered Education Saving Plan
This being said, so long as your GIC is in one of these accounts, you won’t be required to pay taxes on any interest you earn. The majority of registered accounts do have age restrictions on opening them, when you can begin contributing or withdrawing money, and you should be aware of contribution caps.
In many ways, a non-registered GIC is the opposite of a registered GIC. Government regulation and tax benefits are absent from non-registered accounts, therefore you miss out on tax benefits. But you luckily don’t have to worry about any age restrictions or contribution caps.
The difference between GICs and Mutual Funds
Many investors are curious how GICs stack up against bonds and mutual funds. GICs serve a very different function when it comes to mutual funds. Mutual funds invest in a variety of assets, including bonds and equities, some of which can be riskier investments in terms of potential value decline. Additionally, they could offer much higher returns than GICs do. Investors looking for a very safe investment with returns that are delivered over a specific time period should consider GICs.
The difference between GICs and Bonds
When compared to bonds, GICs are relatively safe investments, but they typically offer lower returns than equities do. Some GICs may be a better choice for investors because they currently offer interest rates that are higher than many North American bonds.
Pros and cons of a GIC
There are many different pros and cons to GICs, check out this list of the pros and cons:
Pros of a GIC
Lowest possible risk as an investment
You typically won’t lose your principal because it is usually guaranteed up to the insured limits (and interest is usually guaranteed as well)
You can avoid using your savings by preventing yourself from accessing it without paying a fee
There are many different GIC rates and terms available
They could be kept in accounts that are registered (such as RRSPs and TFSAs)
Interest rates may be significantly higher than those of traditional/simple savings accounts
GIC rates could be higher than those on government bonds
Opening a GIC typically carries no fees.
The minimal investment is quite low compared to other investments
Cons of a GIC
Interest rates can be quite low depending on the market so sometimes it isn’t the best investment to make
Your money must be locked in for a number of years in order to receive the best GIC rates in Canada
If you take your money out early, you’ll have to pay a fee or a penalty if it is non-redeemable or if you withdraw too early with a redeemable or cashable
When you lock in your money for a long time at a low rate during a period of high inflation, your money may actually start to lose value
Is a GIC a good investment?
Yes, GICs are some of the safest investments and offer extremely low risk. They are at the end of the day a guaranteed investment, this means that your principal rate will be returned to you so long as you don’t withdraw early. Large amounts of money can even be guaranteed by most banks, even amounts as high as $50,000 to $250,000. This is a great way to both drive a safe investment and to diversify your investment portfolio. Although you do sacrifice the possibility of a huge return which exists in self guided investments, mutual funds and ETFs, you at least have the safety of not losing your principle which is not possible in most other investments. The best part about a GIC is that you will get your principle and the bank will give you a rate so you don’t have to worry about maintaining your investments or paying someone to do so.
Take a look at these graphs and tables about how a GIC can be a great investment that grows without you doing any work. This reflects the kind of growth you can make on $10,000 if you invest it for 1 year, 2 years, 3 years, 4 years, or 5 years and it is compounded yearly at different interest rates.
What are the risks of GICs?
Your GICs might not keep up with inflation. Regular GICs have a low rate of return, so it’s possible that they won’t make sense in the long term due to inflation.
Variable interest rate GICs do not guarantee a return above your initial investment. Variable interest rates are paid on GICs whose performance is tied to the stock market. However, the risk is higher. Additionally, you won’t be aware of the interest rate until the term is over so the variable rate might earn less than a fixed-rate GIC. Although the amount of your initial investment is guaranteed, there is no assurance that your GIC will generate additional revenue.
Unless you hold your GICs in your RRSPs, RIFFs, or TFSAs, you will be taxed on your interest earnings.
Your GICs are neither guaranteed nor protected if
- The GICs are American.
- You purchased them elsewhere than at a significant Canadian bank or credit union.
- The duration exceeds five years.
How do banks benefit from GICs
The difference between a bank’s lending rate and its rate on GICs represents its profit. If mortgage rates are 8% and GIC rates are 5%, the bank will profit by the 3% difference.
GICs are a great choice to diversify a stream of liquid, safe securities in a portfolio because they provide an annual return that is marginally higher than that of bonds. While a trust company does not actually own the assets of its clients, it may take on some legal responsibility to look after them. Canadian banks sell GICs. In these situations, trust companies serve as trustees on behalf of an individual or corporate body. They only consider the interests of the outside party when choosing investments and safeguards.
Because they are safe, typically liquid, and produce streams of cash, GICs, bonds, and other income-producing investments are frequently wise choices in these circumstances. This is especially true for older investors who may be retired and no longer have a reliable source of income.
How to invest in a GIC?
The best way to invest in a GIC is in a registered account, this really comes down to your savings and investment habits as well. If you are someone who isn’t saving for the long term, you should consider starting a Tax-free Savings Account (TFSA) to be the account holding your investments. Make sure that you check out our TFSA page to learn more about the limitations of a TFSA and contact us to open one up. If you are saving for the long term, specifically for your retirement, then please consider looking into getting a Registered Retirement Savings Plan. The RRSP is a great way to save for your retirement, and it has some awesome benefits to it as well which can help you with continuing your education or with buying your first home, read more about it here! If you have a child, it is best to open up a Registered Education Savings Plan to save up for your child’s education. A RESP will provide you with some grants and bonds from the government which will supplement the amount that you put into your RESP every year! Here is some more information about these accounts.
Tax-free Savings Account
In an effort to help Canadians save money completely tax-free, the Canadian government introduced the Tax-Free Savings Account (TFSA) program in 2009. This kind of savings account offers numerous advantages to anyone with a Social Insurance Number (SIN) who wants to save money for various life stages. It is not taxable to increase the value of the different investment options held in the TFSA, such as cash, stocks, bonds, GICs, and mutual funds. As a result, the income made in a TFSA and any expenses on any management fees are not subject to being taxed. All deposits and earnings are typically tax-free, even when money is withdrawn from the account. If you are interested in learning about TFSA, read our blog about 7 Reasons to have a TFSA.
Registered Retirement Saving Plan
A Registered Retirement Savings Plan (RRSP), which you create and which is authorized by the government, is a tax-advantaged retirement savings plan. When you reach retirement age, you can convert your RRSP into a Registered Retirement Income Fund, buy an annuity, or take a lump-sum distribution to access your savings. You can also take money out of your RRSP to pay for college or to buy your first home.
RRSPs are a crucial component of a safe retirement and are very helpful for young adults who are just starting to save for retirement as well as for those who are almost at retirement!
A retirement savings account, or RRSP, can be used to hold investments and has tax-deferred benefits. As long as the income earned stays in the account, no taxes are due on it. Your RRSP contributions are deductible from your taxes. Although, there is a cap on the annual amount that can be contributed to an RRSP; for 2022, it is $29,210, and for 2021, it was $27,830. Note that the maximum contribution cap amount can also be 18% of your income or the annual contribution limit, whichever is lower. And If you haven’t made annual contributions in full over the years, there is also the carried over contribution room. To learn more, please read our Complete RRSP Guide.
Registered Education Savings Plan
The Canadian government created the Registered Education Savings Plan (RESP) program in 1974 as a simple way for parents, grandparents, and guardians to save for a child’s post-secondary education. Like TFSA and RRSP accounts, Registered Education Savings Plan (RESP) accounts are tax-deferred. which protects by deferring taxes all capital gains, interest, and income earned on the account. This is ideal because the RESP account allows for the purchase of stocks, bonds, mutual funds, ETFs, GICs, and other types of investments. The Canadian government’s ability to provide grants and bonds for your child’s Registered Education Savings Plan (RESP) account is what makes it unique.The Canada Education Savings Grant (CESG) offers up to $7,200 in grants, while the Canada Learning Bond (CLB) offers up to $2,000 in grants for RESP accounts for children from low-income families. For more information about RESP’s, read our RESP Guide.
Frequently Asked Questions (FAQs) about GICs and Investing
A GIC (guaranteed investment certificate) is a low-risk investment that is safe and secure. Since it is guaranteed, you don’t have to be concerned about losing your money, as the principal amount of your investment will always be guaranteed to be returned to you when the investment matures.
There are also several kinds of GICs:
- Non-redeemable GIC
- Redeemable GIC
- Cashable GIC
- Non-registered GIC
- Registered GIC
Yes, GICs are some of the safest investments and offer extremely low risk. They are at the end of the day a guaranteed investment, this means that your principal rate will be returned to you so long as you don’t withdraw early. Large amounts of money can even be guaranteed by most banks, even amounts as high as $50,000 to $250,000.
It’s possible that your GICs won’t match inflation. Regular GICs have a low rate of return, so it’s possible that inflation will prevent them from being profitable in the long run.
GICs with variable interest rates do not ensure a return greater than your initial investment. On GICs with correlated stock market performance, variable interest rates are paid. But the danger is greater. The variable rate may also earn less than a fixed-rate GIC because you won’t know the interest rate until the term is over. There is no guarantee that your GIC will produce additional income, even though the amount of your initial investment is guaranteed.
Unless you hold your GICs in your RRSPs, RIFFs, or TFSAs, you will be taxed on your interest earnings. Your GICs are neither guaranteed nor protected if
- The GICs are American
- You purchased them elsewhere than at a significant Canadian bank or credit union
- The duration exceeds five years
A Registered Retirement Savings Plan (RRSP) is a tax-advantaged retirement savings plan that is established by you and is registered by the government. You contribute to the RRSP throughout your life and once you retire you convert it to a Registered Retirement Income Fund to withdraw your income. RRSPs are an essential part of a secure retirement, and are extremely beneficial to young adults who are beginning to save for retirement and for those who are nearing their retirement!
- Income that is made in the RRSP through investments such as ETFs, mutual funds, stocks, bonds, and GICs are tax-deferred as long as the income remains in the RRSP account.
- The tax-advantaged portion of the RRSP is where the savings occur, year to year prior to your retirement. Any contribution made to your RRSP is tax-deductible, meaning that the contributions you make can reduce the amount of taxes you pay on the current year tax return.
- Your RRSP contribution room can be moved over to future years, or if it is unused. This is especially helpful to reduce taxes during your tax return.
- The RRSP account can be used by couples to reduce their individual taxes as well. For example, if you make more income than your spouse, you can contribute to their RRSP which will reduce the amount of taxes that you pay.
- You can withdraw money from your RRSP account without getting taxed immediately if the amount withdrawn is used towards purchasing your first home under the Home Buyers Plan.
- You can withdraw money from your RRSP account without getting taxed if the amount withdrawn is used towards your education under the Lifelong Learning Plan.
An RRSP is a retirement savings account, this account has tax-deferred benefits which can be used to hold investments and you will not be taxed on the income earned as long as the income earned remains in the account. The contributions that you make to your RRSP are tax-deductible. There is a yearly RRSP contribution limit, for 2022 the maximum contribution limit is $29,210, and for 2021 the maximum contribution limit was $27,830. The maximum contribution limit can also be capped at 18% of your income, or the yearly contribution limit, whichever is lower. Additionally, there is also the carried over contribution room if you haven’t contributed the full yearly amounts throughout the years.
Yes! Tax-Free savings accounts are safe and a product offered by legitimate and credible financial institutions in Canada. The TFSA is one of the safest options for saving money for both short and long-term financial plans. They have non-tax-deductible features which make the amount in your TFSA safe and secure from taxation. The TFSA is one of the best options for all Canadians to make for a safe and secure way to save.
To be eligible to open a Tax-Free Savings Account (TFSA) in Canada, you must be a Canadian resident who is over 18 years of age, and you must have a valid Social Insurance Number (SIN). A non-resident of Canada who has a valid SIN is even eligible to have a TFSA but they will be subject to a 1% for each month their contributions stay in the account.
A TFSA is simply a savings account. With that being said, it is up to you if you want to just put money aside in it and leave it at that, or if you want to pair it with various forms of investments that can provide growth, and have different levels of direction (investments managed by your or by your financial institution).
A RESP works by the sponsor of the plan (parent, family member, guardian) making contributions to the plan. The government then contributes 20% of the amount contributed by the sponsor, the maximum contribution the government will make per year is $2,500.
This is a beneficial account for those who want to save for their child’s education. This account is tax deferred, there are grants and bonds for the account, and it is flexible. It is a well rounded savings plan to save for a child’s education.
The Canada Education Savings Grant (CESG) is a grant that is provided by the government. This is the 20% that the government will contribute to the beneficiary of the RESP. This being said, the maximum CESG contribution the government will make is $2,500 per year. This means that the sponsor of the account will have to put in $12,500 towards the RESP to receive the maximum CESG contribution amount for the year.
Find out what is the best financial option for you
No matter what your financial situation or financial goal is, whether it is short-term savings or long-term capital growth from investments, a GIC might help you get to your goals. If you want to learn more about what is a good investment for you, then please contact our team of financial experts for a free consultation about your financial goals and how to secure your financial freedom.
At Protect Your Wealth, we’ve been providing expert advice for all types of life insurance, and retirement and investing planning, since 2007. As your Life Insurance broker and financial planner, we work with you to create a personalized plan for your family or business that covers and meets your needs.
Contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, ON, and service clients anywhere in Alberta, British Columbia and Ontario, including areas such as Oakville, Abbotsford, Grand Prairie, Oshawa and Waterdown.