6 times when a GIC is a smart investment choice

Issued by banks and trust companies, GICs work much like a savings account with interest rates that are slightly higher. The main difference is you promise to leave the funds alone for a set amount of time—usually ranging from one to five years. Your principal is protected by the Canada Deposit Insurance Corporation (CDIC) (or provincial deposit insurance, for GICs with credit unions or trust companies), up to $100,000 per product, in most cases. You can have multiple insured GICs up to $100,000 in each of your accounts, including registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), non-registered accounts and joint spousal non-registered accounts at one financial institution, and do the same at another institution as needed to ensure your money is fully protected. And the rate of return with GICs is certain. Should you need the cash earlier, in most cases you pay a penalty and get a portion of the interest. There are cashable GICs that let you get out with no penalty, but these tend to offer lower interest rates than regular GICs. (Check out the best GIC rates in Canada right now.)

Given that safety, there are times when a GIC may be just right, says Annie Kvick, a Certified Financial Planner with Money Coaches Canada in North Vancouver. “It’s a great tool to have in your investment toolbox,” she says. “You can pick it up when you have a need for it.”

Here’s a look at some of the circumstances when a GIC makes sense.

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MCAN Wealth 1-year non-registered GIC

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• Interest rate: 4.85%
• Minimum amount: $1,000
• Eligible for CDIC coverage: Yes

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1. Your child will soon be going to college or university

When you start saving for a child’s education, the stock market is a great place to hold your money. With an 18-year outlook to weather market ups and downs, a registered education savings plan (RESP) made up mostly of mutual funds and index funds is likely to get you the largest overall return. But once the kids are only a few years away from going to university, Kvick says many of her clients turn to a GIC when they “just want to park the money in something safe.”

2. You’re planning a wedding, trip or other major purchase

You’ve been saving for a while for your dream wedding or the ultimate vacation, but the big event is still months or even years away. If you’d like to make a little more interest on your funds than you could in your high-interest savings account (HISA)—plus, ensure you won’t be able to dip into them for other things—a GIC is a good bet, says Kvick.

If the big event is sooner, know that short-term GICs are available for terms as little as 30 days. “The important part is to line up the money with the right time horizon. If you don’t know exactly when you’re going to get married, it’s better to have a short-term GIC.” You can roll these over to the next 30- or 90-day period until the occasion arrives.

3. You’re losing sleep over the stock market

“Occasionally, I run into extremely conservative investors who will just not invest in the stock market at all,” says Ed Rempel, a Certified Financial Planner and Certified Public Accountant in Brampton, Ont. He says GICs usually offer a better return than a savings account would. Similarly, if you’re a Canadian stock market investor who’s getting nervous about the prospect of a downturn, says Kvick, it may make sense to shift a portion of your portfolio into GICs to ensure a portion of your funds is protected.

4. You have trouble meeting your short-term savings goals

Keeping a handle on day-to-day expenses can be a struggle, making it tough to leave alone the money you’re setting aside in a savings account. “A GIC is good because it creates a second barrier,” says Kvick. It’s much harder to access the funds in a GIC—and impossible with a non-redeemable GIC. In a savings account you could be tempted to use your debit card at a store or simply transfer the funds when your chequing account runs low. A six or nine-month GIC can help you protect the funds you’ve saved for Christmas presents or a new set of winter tires. To get started, set up an auto-deposit to a savings account that you don’t have connected to your everyday bank card the days you receive your paycheque. Once you’ve amassed the minimum amount required ($500 is common), you can purchase your first GIC. Keep saving money and see if you can add to it, or buy another once the first one matures.

5. You want cash available for good stock market opportunities

One way savvy Canadian investors can make use of GICs is to opt for the redeemable kind to keep some cash on hand for times when market downturns make a desirable stock a little more affordable (Nvidia stock split anyone?). If you have your eye on a stock that’s usually quite expensive, the funds you keep safe from fluctuations in a GIC can help you snap it up when the price is right, says Kvick.

6. You’re retired and will soon need to access the funds for living expenses

You don’t need all of your retirement funds at once; nor should you liquidate them to cash products that make you vulnerable to inflation, says Rempel. Money that’s still going to be invested for another 20 years will have time to bounce back from stock-market lows. But it can be prudent to move the funds you’ll need within the next couple of years into a GIC set to mature then, a process you can repeat incrementally to cover your living expenses and Alaska cruises all through retirement.

Read more about GICs as a good investment:

• What types of GICs are available in Canada?
• Why GICs are a good addition to an RRSP or a TFSA
• How does a TFSA work?
• TFSA contribution room calculator