GIC or Savings Account?

GIC or Savings Account?

I recently had two reasons to look up the going rates on GICs and savings accounts. I thought I’d share what I found with you today and raise the question: Is it worth it to put cash into a 5-year GIC when some savings accounts are paying almost as much while offering the same safety and more liquidity?

Why GICs or Savings Accounts?

I mentioned two reasons I was interested in looking up rates: First, we’ve been contributing more monthly to our sons’ RESP since the older two are turning 17 this year. (Yikes!) That makes this the last year we can contribute to an RESP for them and receive the 20% CESG. As a result, some cash has built up in the brokerage account where we hold the RESP. Since we’ll need the money relatively soon, stocks and bonds are not an option for us. Our discount brokerage doesn’t pay interest on cash balances, so GICs were the only choice other than zero return here.

Second, we have a GIC maturing soon and we need to decide what to do with it. Should we roll it into another GIC or put it in a savings account? This is part of the safety component of our RRSP, so again, I’m not even considering equities or bonds for this particular slice of capital.

Select GIC and Savings Account Rates for Canadians

I didn’t look up rates for every financial institution, so I’m only including the ones I investigated here. While it’s not a complete picture, it does provide a decent idea of the range of options out there today. (These rates were current as of last week and probably haven’t changed much since.)

Sample Savings Account and GIC Rates for Canadians: February, 2012

Ally ING Canadian Tire CT TFSA Questrade
Savings Account 2.00% 1.50% 2.00% 2.75%
1 Yr. GIC 1.50% 1.25% 1.15% 1.40% 1.85%
2 Yr. GIC 1.75% 1.50% 1.55% 1.80% 2.05%
3 Yr. GIC 2.00% 1.80% 1.75% 2.00% 2.30%
4 Yr. GIC 2.25% 1.90% 1.95% 2.20% 2.40%
5 Yr. GIC 2.5% 2.35% 2.43% 2.68% 2.68%

Rather than add a bunch of asterisks to the table, I’ll just point out a few key things here:

  • There are two columns for Canadian Tire Financial. The second lists their rates for TFSA accounts. As you can see, there’s quite a difference. I’m not sure how long that will last.
  • The rates quoted for Questrade (discount broker) are based on the best GIC rates posted in their daily bond bulletin at the time.
  • Not all of these financial institutions offer all kinds of accounts. For example, only Questrade offers RESPs. Canadian Tire and Ally don’t offer RRSPs.
  • Right now, ING Direct is offering a 90-Day GIC for 2.50%. That’s a great rate, but it’s only for RRSP and TFSA accounts, and it’s only available until the end of February. At the end of the 90 days, you’ll need to find a new place for that money.
  • ING is also currently offering a 2% rate on TFSA savings accounts. I’m not sure how long that will last.
  • There are plenty of other financial institutions out there. They may offer other options if none of the above fit for you.

All of this can get a little confusing, but it just goes to show that there are no one-size-fits-all solutions in personal finance. Five different people could look at this information and make 5 different choices based on the type of account they hold, their time frame, and a host of other factors.

Back to our original question: is it worth it to put your money into a 5-year GIC when it’s earning just a hair more than some savings accounts? Well, it depends. If you really want the maximum return on your money and you don’t need it for 5 years or more, it still looks like most 5-year GICs beat most savings accounts. If, however, you don’t want to lock up your cash, or you’ll need it before 5 years have passed, you may want to consider a savings account instead.

There are plenty of options for your cash out there. Understanding your financial situation coupled with a little homework can help you make the choice that’s right for you.

 Have you made any decisions on where to park your cash yet this year?

Written by Kim Petch

9 Responses to GIC or Savings Account?

  1. Definitely savings account, HISA over GICs for me. High liquidity.

    Problem is Kim, I don’t have a great deal of cash :(

    Hopefully we can get our emergency fund up to $10 K by the end of the calendar year. Then I’ll feel better.

    • It’s funny how knowing that emergency fund is there can calm the nerves isn’t it? We keep ours in a high-interest TFSA savings account. The rate is very good compared to the big banks, the interest is tax free, and we have quick access to the funds in the event we really need them.

      Thanks for stopping by Mark!

  2. Have you consider using a GIC broker/dealer like GICdirect.com to get even better rates. They deal with smaller, local saving unions/banks thus you get a few basis points more. For example, my area BC, the best offering for a 1 year RRSP GIC is 2.30%. They’re “free”, they get paid mainly by referral commission, where as some companies take a few percentage of your investment(ie. Edward Jones). So do your own research.

    As for the original question: 5-year GIC vs. savings account? If you’re flexible for either way then consider if interests were to raise within 5 years. If so, then savings. If rates look like they’re downtrend, then lock in 5 years.

    • Thanks for the heads-up VanLarry! I did know about the brokers, but I haven’t seen rates over 2% for a 1 year GIC. I’ll have to check that out.

      On interest rates: I guess no one knows the answer to that question. It seems people have been predicting a rise in rates for years now, but the financial crisis/central banks haven’t let it happen. With rates so low, you would think there’s nowhere to go but up. So far, however, that hasn’t been the case.

  3. Have you shopped the credit unions? Especially the Manitoba market place. Some have specials that apply for both registered and non registered. They even have online services like Outlook Financial that may have some better rates.

    • Thanks Cory. I know the credit unions do offer better rates. The problem I run into with using brokers or credit unions is that we have most of our GICs in registered products like TFSAs, RRSPs, and an RESP. It’s a lot easier to keep each with a single financial institution – although we have the 3 types of accounts at different banks. So if we wanted to get a better rate on a GIC, we’d have to open a new RRSP or other registered account each time we wanted to buy one. I’m not sure if there’s a solution for this or not.

      Maybe someone can share some ideas? Thanks! :)

  4. Cash is usually direct to our mortgage but given that sooner or later we will feel the need to take that decision, I would go with a HISA in order to avoid locking the money. It would become easier to decide once rates move a little bit higher, until then, keep your flexibility.

  5. Regarding GIC interest rates.

    You can get a quick on line comparison for most banks at GIC Direct. Select your province and viola.

    TD and some other banks offer GIC type products say with a 3 year term and you can withdraw 20% on the anniversary date every year. Believe that a couple of others like RBC and BMO offer something similiar.
    Remember you have to be alert to timing as I suspect the banks are quite rigid on the date that you do this.

    good luck

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