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Frequently Asked Questions About GICs

Frequently Asked Questions About GICs

If you don’t like something, change it; if you can’t change it, change the way you think about it.

~ Mary Engelbreit

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?

Comments

  1. WealthWebGurus.com

    Nice Primer. I’ve been a fan of GICs for a long time. I am in the middle of re-writing the second edition of my Book Seven Strategies to Guarantee Your Investments. Should be released in June of this year. http://www.retirehappy.ca/products/seven-strategies

    • 2 Cents

      Sounds like an interesting read. Thanks Jim!

  2. Four Pillars

    Thanks a lot for the link!

  3. becky thon

    what happens if my GIC matures and I haven’t addressed it, or if it is close to maturing and I didn’t deal with it? Will it sit there and wait or do they take the money from me?
    I don’t bank at RBC anymore, so I forgot I had it until I got a letter saying it was maturing mid may. I have to make an appointment to go in and talk to someone, but I was just wondering if it’s legal for them to just close my account and keep the money since I’ve been MIA.

    • 2 Cents

      Usually what happens at maturity is set up when you buy the GIC. I don’t know the specifics of your GIC, but I can’t imagine the bank would ever have the right to take the money from you.

      When you go in to talk to the bank, they will likely want to set you up with some RBC products. If that’s not what you want, just ask them to cut you a cheque or have the money deposited to your regular bank account.

    • Dave

      It depends on the instructions. The money will either be placed in a savings account or reinvested at the same terms as the previous GIC

  4. Richard

    My father passed away and had GIC’s. In his will, he had given his assets to me including the GIC’s. When someone pass away, does the GIC’s become void and the beneficiary receives the amounts to do whatever they want?

    • 2 Cents

      Sorry for your loss. You would have to check on the particulars of the GICs and the terms of your father’s will. If they were bequeathed to you “in kind” (that means “as is”) they would remain invested until they mature. Once they mature, you can either roll them into new GICs, other investments, or take the cash and put it in a savings account – or spend some of it.

  5. Ruth

    If i had asked this before, forgive me but wanted to try for two opinions. i recently bought a $25,000 GIC and made my daughter beneficiary on it. Since then , things have changed between us and i would like to take her off or cash it and pay the penalty, do you think there is a chance for this, i did this GIC with an independent broker. I will never do this again.

  6. Sammy

    I apologize in advance if this is not the proper forum to ask the following question:

    My sister purchased a $500 GIC for my son on his 1st birthday in 1995. She said that she would continue to reinvest the GIC until his 21st birthday. Are you able to estimate the amount my son might receive from his 20 year old GIC.

    The GIC was purchased in Toronto in 1995.

    Thanks

  7. Gwen

    Can the government say how much you are allowed to draw from your hoc a month

  8. Ross

    I have a GIC that is maturing shortly but is in my RRSP. Am I able to transfer the matured balance into my savings or checking account. Will I be taxed on the amount.Thanks

  9. Sonam

    Thanks Kim for your informative posts. My question: we had to take a most of money out of Tfsa and Gic last year to buy a small condo after my dad passed as my mom couldn’t deal w loss in our old house. I know tfsa withdrawals are not considered taxable income but what about GIC.. Is the withdrawal amt considered income and do you report it as income? I can’t find answer to this anywhere so hope I’ve come to right place . Thank you

    • M Nadeem

      Sorry for your loss, you’re absolutely right about the TFSA but if the GIC was not bought from the TFSA then any profit from the GIC would be considered interest income and yes you would have to report it.

  10. Sue

    If a person takes her money from her GIC at maturity and puts it in a regular savings account will that affect her supplement to her old age pension.

  11. Med

    Hi there, is there a buyer’s remorse period when buying GIC? Say I bought 100k one year GIC and 2 days later, for whatever reason, I decide to cancel it.
    Can I do it with no issues understanding that I will lose any interest accrued during those few days?
    Thanks, Med

    • M Nadeem

      Some GIC’s have cancellation costs, others are cashable or redeemable. You would have to ask your broker more about these details, and for others reading this post make sure to ask these questions before investing in a GIC as sometimes your broker may not address this.

  12. Joanne

    Hi I want to roll my RSP GIC into my TFSA when it matures. My bank is saying that I will be taxed if I do that, is this true ?

    • Tom Drake

      Hi Joanne,

      Yes, you’re still truly withdrawing from your RRSP, so it would be taxed as income that year. Your best bet is to keep that money in an RRSP (whether it’s a GIC or something like ETFs) and put new money into your TFSA.

      • Joanne

        Ok thank you for the info

  13. Steve Brown

    Outlook Financial’s “fully cashable GIC” not only has a penalty for early withdrawal, they even appropriate a portion of deposit funds, as well. See
    OUTLOOKOUTFINANCIAL.COM

    What is your impression?

  14. Mary

    I understand that I cannot designate beneficiaries in my GICs in my TFSA. Do I need to have my children’s name along with mine on the GIC to ensure that they receive the money?

  15. jimmy

    tax question for 1 yr gic

    If i buy a 1 yr GIC in june 2018, do I have to report accrued interest from june to dec 31 2018 in my 2018 taxes.

  16. Ryan

    Is there an age limit to have a GIC in your name? I recently bought one for my nefew who’s 3 years old, but they put it under my name….can’t it be registered under his name?

  17. Ed

    I purchased a five year GIC in July 2018 which generates annual interest income of over six figures. At the time of purchase I asked to have the interest rolled over until maturity. The second interest payment of about $100,000 is due July 10, 2020. Can I ask my financial institution to put the interest in my checking account rather than rolling it over? A couple business opportunities have popped up and I wish to take advantage of these situations.

  18. karthi

    Hi does getting a 5000 gic help boast credit score

  19. CanadianInvestor

    When a person dies with GICs, the executor may request that the financial institution cash in / redeem the GIC. There is no penalty and any accumulated interest owing is calculated and paid into the estate. As a power of attorney I recently bought GICs for my aged parent with that knowledge in mind.

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