A Guaranteed Investment Certificate (GIC) provides investment options that give you fixed rates of interest for set periods of time. GICs are issued in your name and can’t be sold except to the institution that issued them. You agree to keep the money in the GIC for a set period in return for a set rate of interest. Due to their low-risk profile, the return is generally less than other investments such as stocks, bonds, or mutual funds.
What is a Guaranteed Investment Certificate (GIC)?
GICs are a good choice for people who want to minimize risk in their investments, or who are looking to balance other investments that have more risk. Generally, you must deposit a specified minimum amount to purchase a GIC. There may be a fee to set up the account. They are not tied to market fluctuations and your principal may be protected by the CDIC up to coverage limits. Longer-term GICs usually offer a higher interest rate than short-term GICs.
Are GICs Safe?
GICs are a flexible and secure way to meet both short- and long-term savings goals.
- Planning to buy a new car or pay off a mortgage? A GIC offers higher rates than what’s offered by most standard bank savings accounts
- Saving for retirement? The guaranteed interest helps balance the risk of your overall retirement portfolio, and your Registered Retirement Savings Plan (RRSP)
- Living in retirement? Easily convert into a Registered Retirement Income Fund (RRIF) to generate a steady stream of guaranteed retirement income with a laddering strategy
Do I Have to Pay Tax on the Interest I Earn on My GIC?
- Non-Registered: on your tax return, include the interest you’ve earned as taxable income in the year it’s paid to you or credited to your GIC
- RRSP: you don’t pay any tax until you withdraw money
- RRIF: you don’t pay any tax until you withdraw your money
- Tax-Free Savings Account (TFSA): you don’t pay any tax on investment growth
Get More Out of Your GICs with Laddering
Laddering is a simple investment strategy that involves having investments with different maturity dates, allowing you to take advantage of different interest rates for each term. Helps manage your exposure to interest rate risk: since only 20% of your GIC matures each year, if interest rates have temporarily fallen, only this 20% is exposed to the lower rate.
- Divide this amount into five smaller amounts
- Pick guaranteed investments with 1, 2, 3, 4 and 5-year maturity dates for each of these smaller investments
- When your first investment matures after one year, reinvest that plus the interest you’ve earned in a 5-year investment term
- Repeat as each investment term matures by selling preferably equity investments to reduce portfolio risk
