Guaranteed Investment Certificates, or GICs are a good option for those who want to invest with low risk. They usually offer a guaranteed return on a fixed interest rate and ensure your initial investment is safe.
What is a GIC?
GICs, or Guaranteed Investment Certificates, are investment products where you deposit your money with a financial institution for a set period, earning a guaranteed interest rate. They’re also known as term deposits because your money is locked in for a specific time, which can range from 30 days for short-term GICs to 10 years for long-term GICs.
While GICs may not be the best choice for your main investment, they become more appealing during times of rising interest rates and economic uncertainty. They are a safe and popular choice in Canada because they usually offer moderate to high returns. Typically, the longer you commit your money, the higher the interest rate you’ll receive—so a three-year GIC might pay more than a one-year GIC.
How does a GIC work?
When you buy a GIC, you’re entering into a contract with a financial institution, usually a bank or a credit union. Here’s what that contract usually includes:
- Investment Amount: The minimum deposit required by the bank, or a higher amount if you prefer.
- Interest Rate: The fixed percentage rate you’ll earn, which can be paid monthly or annually, depending on your choice.
- Length of Term: The period your money will be locked in, which can range from a few months to several years.
For example, if you invest $10,000 in a one-year GIC with a 4% interest rate, you’ll earn $400 in interest by the end of the year, making your total $10,400.
- Date of Maturity: When your investment term ends, the interest payments stop. At this point, you can either reinvest or withdraw your funds. If you don’t provide instructions, the bank may automatically reinvest your money, but you have 10 business days to cancel this new term.
Generally, GICs are non-redeemable, meaning you can’t take out your money before the end of the term without facing a penalty. Some GICs are redeemable, but they usually offer lower interest rates. You can also find various GIC options to match your saving goals.
Types of Guaranteed Investment Certificates
Understanding different types of GICs can help you choose the right ones for your investment needs. Here’s a breakdown:
- Fixed-Rate GICs: These are the most straightforward. They pay a fixed interest rate based on your deposit and the term length. For example, if you invest $10,000 in a one-year GIC with a 4.20% interest rate, you’ll end up with $10,420 at the end of the term.
- Variable-Rate GICs: The interest rate can change during the term based on the financial institution’s prime rate. They can be beneficial if rates rise, but less favorable if rates drop. Your principal is guaranteed, so you won’t lose the money you have put in, but the actual interest payout will vary.
- Market-Linked GICs: These GICs are tied to stock market performance. If the market rises, your returns increase. If the market falls, your returns decrease, but your principal remains protected.
- Registered GICs: Held in government-registered accounts like RRSPs or TFSAs, these GICs allow your savings to grow tax-free. However, you need to watch for age (in case of RRSPs) or contribution limits (in case of both RRSPs and TFSAs).
- Non-Registered GICs: These are not held in any registered accounts and don’t offer tax benefits. There are no limits on contributions or age restrictions, but the income from them is taxed.
- Foreign Exchange GICs: These involve investing in foreign currencies, such as U.S. dollars, and earning interest in that currency.
The advantages and disadvantages of GICs
GICs can be a good choice for investors with a short-term horizon and low risk tolerance, but it’s important to weigh the pros and cons:
Advantages:
- Principal Security: Your initial investment is safe and returned in full at the end of the term.
- GICs are insured: GICs from CDIC-member banks are insured up to $100,000. GICs from credit unions are covered by provincial insurance; for example, Ontario residents are insured up to $250,000 through the FSRA’s Deposit Insurance Reserve Fund (DIRF).
- Simple Returns: Fixed-rate GICs offer easy calculation of returns based on the term length and deposit amount.
- Higher Rates in Rising Markets: You often get better returns when interest rates increase.
- Tax Benefits: Interest earned in a registered GIC is tax-free.
Disadvantages:
- Minimum Investment: GICs usually require a minimum deposit, often $500 or $1,000.
- Locked-In Funds: Your money is tied up for the term, and early withdrawal can lead to penalties.
- Inflation Risk: The interest rate might not keep pace with inflation, potentially reducing your purchasing power.
- Tax on Non-Registered GICs: Interest earned on GICs outside of registered accounts like a TFSA or RRSP is taxable.
How to purchase a Guaranteed Investment Certificate?
If you have an online banking account with a bank or credit union, you can usually buy a GIC easily online. If you need to open a new account with a different institution, you’ll have to visit a branch or call an advisor. You’ll need to provide:
- Personal details (email and home address).
- Two valid government IDs (like a passport and driver’s license).
- Your Social Insurance Number (SIN).
Decide where to hold your GIC, such as:
- Tax-Free Savings Accounts (TFSAs).
- Registered Retirement Savings Plans (RRSPs).
- Registered Retirement Income Funds (RRIFs).
- Locked-In Retirement Accounts (LIRAs).
- Non-Registered Accounts.
Guaranteed Investment Certificates in tax-friendly accounts avoid taxes on returns. In non-registered accounts, interest earned is fully taxable, but GICs still offer the safety of fixed-income investments.
You can learn about the best GIC rates in Canada for 2024 here.
