Why GICs are a good addition to an RRSP or a TFSA

How GICs work

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.

Choosing the right kind of GIC for you

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).

Why hold a GIC in an RRSP or a 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.

sponsored

MCAN Wealth 1-year non-registered GIC

go to site

• Interest rate: 4.05%
• Minimum amount: $1,000
• Eligible for CDIC coverage: Yes

go to site

Read more about GICs as a good investment:

• How does a TFSA work?
• TFSA contribution room calculator
• What’s my RRSP contribution limit?
• How do the RRSP contribution carry forward rules work?

About Keph Senett

Keph Senett writes about personal finance through a community-building lens. She seeks to make clear and actionable knowledge available to everyone.