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If you’re looking for ways to protect or grow your savings, a GIC may be the right solution—especially if your earnings can grow tax-free.
It’s tax time again, which means Canadians may be thinking about tax-smart ways to invest to reduce their tax burden next year. Adding guaranteed investment certificates (GICs) to your investment portfolio may help bring safe and solid returns.
When you purchase a GIC, you agree to leave a deposit with the bank for a certain amount of time—the term—and in return, the bank agrees to pay you a guaranteed interest rate. The key word here is “guaranteed,” meaning that you aren’t at the mercy of market fluctuations, and 100% of your principal is protected.
As long as you don’t withdraw your money during the term, you’ll earn that rate when the GIC reaches its “maturity date,” or the end of its term. The exception is redeemable (or cashable) GICs, which you can cash in earlier—more on that below.
You can usually start investing in GICs with as little as $500. There is no fee to purchase one, and your deposit is typically protected by Canada Deposit Insurance Corporation (CDIC) insurance.
How do you choose the right GIC for your financial situation and strategy? First, look at interest rates and terms. You’ll notice that, generally speaking, the longer you leave your money with a bank, the better the interest rate, but there are also special offers to consider.
Next, consider whether you want to buy a non-redeemable or redeemable GIC. With non-redeemable GICs, you agree to leave your deposit with the bank for a set amount of time, and in return you benefit from a higher interest rate. If you think you might need access to your cash earlier, you can get a redeemable GIC, but the interest rate will likely be lower in exchange for the flexibility.
Finally, you can choose whether or not the GIC will be held in a registered account such as a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).
If you want to lower the tax you pay on GIC interest as you save towards a financial goal (such as a home down payment, a wedding or a retirement nest egg), consider holding the GIC in a registered account—your earnings will be tax-deferred.
With an RRSP, you won’t pay tax on the interest until you withdraw the funds from your plan, and with a TFSA, you won’t pay tax at all (as long as you don’t exceed your contribution limit). That’s an especially big benefit at today’s interest rates.
Registered GICs are flexible, safe investments, and they can play an important part in your overall financial strategy. Buying a registered GIC is just like buying any other GIC, but it is registered as a part of your RRSP or TFSA. When you contribute to your RRSP or TFSA to buy a GIC, this counts towards your contribution limits, so make sure you confirm how much room you have with the Canada Revenue Agency.
GICs are protected investments—a welcome feature in today’s roller-coaster markets—and these days, they’re offering strong returns. Consider a GIC if you’re looking for a safe haven to park some savings or earn interest. With varying interest rates, terms and degrees of flexibility, you’re sure to find a GIC product that’s right for you.
This is an editorially driven article or content package, presented with financial support from an advertiser. The advertiser has no influence on the creation of the content.
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