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.

Why GICs are having a moment

While GICs are known for being safe investments, they have not offered high interest rates in recent years. Right now in Canada, however, stocks are down and interest rates are up. This means that financial institutions are offering GICs with very attractive rates, presenting an opportunity to Canadians looking for a safe and guaranteed investment with a good rate of return.

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. For instance, right now you can earn up to 15,000 Scene+ points on an eligible Scotiabank GIC. (Offer ends March 31, 2023.)

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.

For example, the one-year cashable GIC at Scotiabank offers 1.90% interest, but you can cash out any time after the first 30 days without penalty. Compare that to the 18-month non-redeemable GIC, which offers an interest rate of 4.85%. (Rate current as of Feb. 1, 2023.)

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.

Read more about GICs:

• What types of GICs are available in Canada?
• How GIC returns are taxed in Canada
• Compare the best GIC rates in Canada
• Is now the time for retirees to sell stocks and buy GICs?