Why GICs are a good addition to an RRSP or a TFSA + MORE Aug 9th

A guaranteed investment certificate (GIC) may seem like your grandfather’s kind of savings product. After all, his generation was fond of similar investment tools, like government savings bonds and treasury bills, and benefited from periods where interest rates were high enough in Canada to make these low-risk products quite attractive to savers and investors. And with market watchers suggesting further rate cuts coming, interest in Canadian GICs is piquing.

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…

Find out your current tax-free savings account (TFSA) contribution limit by using this calculator.

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Tax-free savings account is a bit of a misnomer. While you can use it for straightforward savings, think of it more accurately as an investment holding account to store things like exchange-traded funds (ETFs), guaranteed investment certificates (GICs), bonds, stocks and, yes, plain old cash. While you do have to abide by the set amount of contribution room each year, any growth you earn on those investments will not affect your contribution room for the current year or years to come. Plus, the income earned is tax-free (more on that below). Any resident of Canada who is 18 or older and has a valid social insurance number can open a TFSA.

sponsoredMCAN Wealth 1-year non-registered GICgo to site

Interest rate: 5.10%

Minimum amount: $1,000

Eligible for CDIC coverage: Yes

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Is a TFSA really tax-free?

TFSA contributions won’t reduce your taxable income and generate a tax refund, unlike registered retirement savings plan (RRSP) contributions…

GICs have made a big comeback. The current higher-than-usual interest rates on guaranteed investment certificates have been one of the few bright spots in personal finance news. GICs may be a good place to set aside your money while you save towards a financial goal. Not only are they safe and secure, but you can select from a menu of different terms, interest rates and types—including registered and non-registered GICs, depending on where you plan to hold your investment.

Generally, the longer the GIC term, the higher the interest rate. You can also choose from redeemable and non-redeemable options. Redeemable GICs are more flexible—you can cash them in anytime without penalty—but they tend to pay lower interest rates. (Learn more about how GICs work.)

Registered vs non-registered GICs: Which should you choose?

You can hold GICs in a registered or non-registered account, and you’ll need to indicate which one when you purchase the investment.

Registered accounts offer the benefit of tax sheltering, meaning that you won’t pay tax on your earnings until you withdraw them from your account—and in the case of a tax-free savings account (TFSA), you never have to pay tax…

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.

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…

One of the side-effects of working for a personal finance magazine is that I’m always asked for advice. I always oblige, albeit sheepishly, without letting on that I’m still learning, too (which I freely admit here). For instance, the other day I was having lunch with some friends when we started talking about money. The exchange went something like this:

Friend: Ugh, I’m so lost when it comes to money. What should I do?

One of the greatest mistakes young people can make right now is not realize that their money can do more than just sit there.

Me: Well, do you have a TFSA?

Friend: Yes (in a proud voice).

Me: That’s great, you’re ahead of the game. What are you investing in?

Friend: W-w-what?

I then went on to explain what a TFSA really is. The tax-free savings account is not, I repeat, not just a savings account.

sponsoredMCAN Wealth 1-year non-registered GICgo to site

Interest rate: 5.10%

Minimum amount: $1,000

Eligible for CDIC coverage: Yes

go to site

What is a TFSA?

A tax-free savings account (TFSA) should really be called a tax-free investment account…