If you don’t like something, change it; if you can’t change it, change the way you think about it.
~ Mary Engelbreit
Update: This post is featured in the Money Hackers Carnival #111 posted at Deliver Away Debt. Thank you!
I recently wrote about How to Ladder GICs. That post lead to number of general questions about GICs, so I thought I would provide some information for you here. Although GICs are among the safest and simplest investments out there, there are enough options surrounding them to make choosing one almost as confusing as choosing other types of investments.
Why Invest in GICs?
Guaranteed Investment Certificates can offer investors a safe place to invest a portion of their capital. Depending on the length and features of the GIC you purchase, they can provide some liquidity as well. In general, GICs are much safer than stocks, although many would argue that you can earn more in stocks over the long term.
GICs can act as a risk balancer for your portfolio. Although stocks can provide higher returns over certain periods of time, those returns are never guaranteed and your individual return on investment will depend on a whole host of variables over which you may or may not have some control. GICs are of course, by definition, guaranteed.
Are GICs a Safe Investment?
Yes. The only time your GIC money would truly be at risk would be if you had stepped outside of the CDIC boundaries for insuring GICs (and your financial institution failed). The CDIC insures money invested in GICs on terms of 5 years or less up to $100 000 per eligible institution per person. That means that you could theoretically have up to $100 000 in GICs at one institution in each of 3 accounts: one in your name, one in your spouse’s name, and one joint account. The entire $300 000 would be CDIC insured. For more on different scenarios, check out the CDIC’s Deposit Insurance Calculator.
One other concern is that you need to make sure that you choose the right term and product features. If you think that there’s a chance you might need the money in a year or two, don’t invest in a 5 year non-redeemable GIC. As always, it’s important that you understand what you’re buying.
Where Can I Buy GICs?
GICs are offered by banks, credit unions, trust companies, and some brokerages. They are usually free to purchase, although some brokerages charge a commission on GICs. (My brokerage is Questrade and they charge a $30 + GST fee for purchases and early redemptions. ) You can find the best rates by surfing the net or consulting an RDBA (Registered Deposit Brokerage Association) member like Fiscal Agents.
Is There a Minimum Amount I Need to Invest in a GIC?
It depends on the specifics of the product you are buying. Some providers have no minimums and others are as low as $100. Check with your bank or broker before you buy. Some institutions will offer higher interest rates for larger investments, but be careful that you don’t exceed your CDIC limits.
How Are GICs Different from Bonds?
Bonds are basically I.O.U.s. You lend money to a government or corporation in exchange for a certain coupon or interest rate. There are two main components to a bond: the price and the yield. The price and resulting yield of a bond can fluctuate daily as they are traded on the open market. But this will not affect you unless you sell your bond before it matures.
GICs are not traded daily like bonds. There is no price or yield fluctuation. The only factors that might affect your return are the terms of the GIC itself. Sometimes there is a penalty for early redemption.
Are GICs a Good Place to Put My Emergency Fund?
The purpose of an emergency fund is to have liquid cash ready to deploy as needed. While many consider GICs to be a portion of the “cash” part of their investment portfolio, they are not quite as liquid as cash in a savings account. It depends on the terms of the GIC you purchased. Some short-term GICs are cashable, but you can usually get a better interest rate with a high interest savings account.
Some folks elect to keep the smaller “what if my dishwasher dies” portion of their emergency fund in a high interest savings account, but the larger “what if I lose my job” part in a portfolio of laddered GICs. In the end, the choice is yours and it will depend on your individual situation.
Can I Put GICs in My RRSP, TFSA, or RESP?
You can hold GICs inside RRSPs, TFSAs, and RESPs as long as those types of products are offered by your institution. If your RRSP or RESP is with a big bank, they pay very low interest rates on GICs. Most online discount banks pay higher GIC rates, but don’t offer RESPs. Only a few of them offer RRSPs so far.
Keep an eye out for higher promotional rates on RRSPs and TFSAs, as they are often available at select times of the year. (For those who read the Globe and Mail Me & My Money feature, my 90-day RRSP GIC at 3% recently matured and I rolled it back into my savings account, as that rate was no longer available as of April 1st, 2010.)
Which Term Should I Choose?
You can usually choose a term of anywhere from 30 days to 10 years. If you choose a term over 5 years, your GIC will not be CDIC insured. If you choose a term under 1 year, your interest rate will often be lower than what you could get in a high interest savings account. (Unless you can find a really sweet special rate somewhere!)
How Will Taxes Affect My GIC?
If you hold your GIC outside of an RRSP, TFSA, or RESP, your income on the investment will be taxed as interest income. There is no additional tax on the principle amount invested as that was already taxed as income. GICs inside RRSPs are like any other RRSP investment: they are not taxed until you take money out of the RRSP. At that point, you will pay tax on whatever money you withdraw at your marginal rate.
If you take any money out of your TFSA, it’s tax free. That means that the interest you earn inside a TFSA (unlike in an RRSP) is truly tax free. RESP withdrawals are more complicated and beyond the scope of this already-too-long post. Check out Four Pillars for some very comprehensive information on RESPs.
How and When Will I Receive My GIC Interest?
This can vary greatly, so it’s something you definitely want to note when you’re shopping for GICs. Some GICs will be structured to pay interest monthly, quarterly, or yearly. Pay attention to the way interest is calculated as well. For example, one GIC might compound interest monthly or even daily and pay it out quarterly. Another product might compound interest annually and pay it out at maturity. The key is to thoroughly understand how interest is compounded and how it is paid before you buy. Don’t be shy about asking as many questions as it takes.
What Happens When My GIC Matures?
This is something you need to determine with your provider. In general, you may have the option to roll the money into a GIC of the same term, a GIC of a different term, or a savings account. Alternatively, you could take the money out and spend it. Just make sure the money is going where you want it to go once the GIC matures, and set it up in advance.
What if I Need the Money Before My GIC Matures?
This is a critical question to ask your provider. Generally, the more access you have to your money, the lower the rate you will receive. Some GICs are cashable, and others are not redeemable at all. Some offer early redemption with a penalty. That means if there is any chance you might need that money before the term is up, you need to make sure that you can access it, and that you’re prepared to accept any applicable penalties.
Do you have any questions that I didn’t cover here? Are GICs a part of your investing/savings strategy?