All You Need to Know About GICs
How Do GICs Work?
Setting up a GIC is easy—just like setting up any other bank account, you can create it in person or online. However, most GICs will have a minimum investment required. This is usually $1,000, but some GICs have minimums as low as $500 and others as high as $10,000.
When it comes to choosing between the GICs out there, you want to pay special attention to interest rates, the term, and the conditions for cashing the GIC. You then want to choose what fits best with your financial goals.
Important Features of a GIC
GIC terms can range from 30 days to 6 years. It’s important to pick the right GIC, because once your money is in a GIC, it’s supposed to stay there until the GIC matures (until the term ends). This makes GICs a great place to save for financial goals with a fixed timeline, or a place to put money you won’t need to spend anytime soon. They are not usually a good choice for cash you may need to access in case of emergencies or other unexpected expenses, which would be better placed in a chequing account.
GICs typically pay interest on an annual basis or at maturity, though some will pay interest on a more frequent schedule. These interest payments are typically added to the balance so that it can continue to compound until the GIC term is up. Alternatively, sometimes you can choose to have the interest paid out to a different account, in which case the GIC becomes a source of passive income. Longer terms typically offer higher interest rates.
You can learn more about the range of GIC interest rates by comparing the best GIC rates Canada offers.
Conditions for Cashing
When a GIC term ends, the GIC is said to have “matured.” At that time, your money, plus the interest it generated, become accessible to you again and you can cash the GIC. You can then put the money toward a financial goal, or roll it over to a new GIC and continue earning even more interest!
It’s important to know the rules of the GIC before you end up selecting it. Some GICs will not let you cash out before the term is up, while others will permit it but require you to forfeit the interest generated. Finally, there is the risk of penalties or fees if you cash the GIC out early. This depends on the type of GIC you buy and the conditions of cashing it out, so make sure you read the fine print and know exactly if or how you can access your money before the GIC matures.
What Is the Investment Risk of a GIC?
GICs are low-risk investments, comparable to cash held in chequing or savings accounts. They’re defined as low risk because you are guaranteed to get back the money you invest. GICs are insured if purchased from a bank or credit union, so you will get your money back even if the bank closes down.
Equity or market-linked GICs don’t pay a fixed interest rate, so there is some investment risk. While you still cannot lose your original investment, it is possible the return on your money will be lower than expected or even zero.
What Types of GICs Are Out There?
There are a number of different GICs available to you depending on your financial needs. For Canadians, GICs can be specific to lifetime milestones, like saving for retirement or saving for your child’s post-secondary education. There are also special GICs for international students studying in Canada.
GICs can also vary by whether they are redeemable, cashable, or non-cashable, giving you varying degrees of flexibility as to when you can access your funds. Many GICs are cash investments, but others are market or equity linked, which can give a variable rate of return. Below is a brief overview of the different types of GICs and how they work.
You can purchase registered GICs to tax-shelter your investment income. This is a great way to maximize the higher interest rates offered by GICs.
- Registered Education Savings Plan (RESP) GICs. The RESP is an account designed to help parents or guardians save for their child’s future post-secondary education. Because you can estimate approximately how many years until your child begins college or university, you can select a GIC with a term to match the timeline. If it’s more than 5 years until your child begins their post-secondary schooling, you can keep rolling over your investment to a new GIC as the old GIC matures.
- Registered Retirement Savings Plan (RRSP) GICs. The RRSP is an account to help Canadians save for retirement. Any investment income you earn inside the RRSP, like interest on your GIC, will not be taxed until you make a withdrawal. Since most people will not withdraw from their RRSPs until retirement, this is a great place to tax-shelter investment income.
- Tax-Free Savings Account (TFSA) GICs. The TFSA is a special account where all investment income, like interest from GICs, is completely tax-free. This makes the TFSA one of the most powerful investing tools available to Canadians. GICs are a great way to earn high interest on cash inside your TFSA.
Because the RESP, RRSP, and TFSA are registered accounts, they have their own rules about contributions and withdrawals, in addition to the terms and conditions of a GIC. Make sure you understand how these accounts work to determine if they are the best place for your GIC.
Cashable and Redeemable GICs
Cashable GICs will let you access your money before the GIC matures, but only after a period during which your funds are locked in. Most cashable GICs have a term of 1 year, in which the first 30 to 90 days is a closed period where you cannot access your investment. After the closed period passes, you can cash out your GIC even if the term is not up. You will only be paid interest for the time your money was invested.
Redeemable GICs can be redeemed before maturity. Whether this results in a lower interest rate, a forfeit of the interest earned, or has no effect on the interest rate depends on the financial institution. This is a great option for investors that want a higher rate of return, but don’t want their money to be inaccessible.
Some GICs will be non-cashable and non-redeemable, which means you cannot access your investment at all until the GIC matures.
Market and Equity-Linked GICs
Market or equity-linked GICs are tied to the stock market. Their return is not a fixed interest rate, but instead is linked to the performance of an index. This might be the whole stock market, or a more specific index. In this case, the return you get depends on the market index return. These GICs are excellent for investors that want exposure to a higher rate of return in the market, but don’t want to put their capital at risk.
US and Foreign Currency GICs
US or foreign currency GICs let you buy a GIC in US dollars or another currency. This can be a good way to protect your cash from currency fluctuations while earning interest. If you think the Canadian dollar will go down in comparison to the US dollar or another currency in the coming year, you might choose to invest in a US or foreign currency GIC to protect against this decline. This type of GIC can also be a great way to save for an international vacation!
Student GICs help foreign and international students study in Canada by providing proof of funds, which can help secure visas for study or help qualify for citizenship, depending on a student’s needs. Participants invest a larger sum—usually $10,000 to $50,000 plus a fee for the program—into the student GIC before coming to Canada. Once the student arrives in Canada to study, a portion of the GIC is immediately available for use. The funds are then gradually distributed over a 12-month period, until the whole investment is paid back including interest.
CDIC vs. Province-Insured GICs
Guaranteed Investment Certificates at both banks and credit unions are insured in case of failure. This insurance protects your investments, even if the financial institution closes or goes out of business.
Most banks offer Canadian Deposit Insurance Corporation (CDIC) insurance for GICs. CDIC insurance covers term deposits for up to 5 years and $100,000 at any single financial institution. Coverage is free and automatic, so there’s no extra paperwork you need to fill out. Your GIC is protected as soon as you invest. Likewise, in the event of a failure, you do not need to file a claim in order to be paid out.
Credit unions have their own provincial insurance plans for deposits, so coverage can vary. Some coverage exceeds that offered by CDIC by providing coverage on unlimited amounts, but other insurance plans do not cover as much as CDIC or only cover certain circumstances. If you’re not sure what is covered or how much, ask the credit union directly for clarification.
Whether you go with a bank or a credit union, it’s important that the financial institution you buy a GIC from provides some level of insurance in order to protect your investment. How much you feel is adequate for your financial peace of mind is up to you as an investor.
GICs are the best investing tool in Canada for earning high interest while keeping your cash super safe! Make sure to shop around to find the best GIC for your investor personality and financial goals, and start earning more interest on your money.