The registered retirement savings plan (RRSP) contribution deadline is just over a month away, on March 1, 2021. Contributions are tax-deductible and can reduce any amounts owing or result in a tax refund — saving you money.
It is always important to plan for any funds deposited into an RRSP, like any investment. That means preparing for how much money you put into your RRSP, the investments you will hold within the account and how long before you will need to withdraw any funds.
For many people, the money contributed to their RRSP will remain in the account until they retire. Still, there are exceptions and opportunities to use money from an RRSP before retirement for certain life events.
Compared to other RRSP investments, guaranteed investment certificates (GICs) have the advantage that they are a sensible, safe, low-risk investment strategy to grow your wealth all year long.
They don’t suffer from the same price and value fluctuations as stocks, for example, which means you can count on your money being there when you need it. For this reason, they are ideal as a short-term guaranteed investment.
This article will explore several different life stages where GICs may be a valuable part of your RRSP strategy — like if you plan to use the Life Long Learning Plan (LLP) or Home Buyers’ Plan (HBP) in a few years, or if you are close to retirement already.
So, before you put another cash deposit into your account, consider purchasing a GIC instead. Each GIC in your account will count as a contribution and can boost your earnings through additional interest.
What is a GIC?
A GIC is a secure investment product issued by a bank, credit union or other financial institution that guarantees 100% of your principal (your original investment) while earning interest.
GICs require the investor to deposit money for a set period ranging from a month to upwards of 10 years. Usually, GICs with longer terms offer better interest rates and higher returns on your investment.
Plus, your money is protected by the Canada Deposit Insurance Corporation (CDIC) in most cases. If your product is eligible, the CDIC coverage will insure up to $100,000 in value for the length of the term (formerly up to 5 years).
Who can benefit from a GIC?
Commonly, investors use GICs as a good short-term investment strategy for relatively dependable returns.
This approach can help investors grow their savings at any stage of life. However, GICs are best for those with a plan for the money when the product matures. Ideally, the GICs would keep the money safe until the investor is ready to use it.
For years, experts would recommend a 60/40 split of high-risk and low-risk investments. Although many say this method can no longer keep up with today’s economic climate, it is always a good idea to diversify.
Related read: The GIC Laddering Strategy: Reach for Returns with Safety
Investors can start with GICs and move on to more complex investments when they become more established.
Travelling the world, buying an engagement ring, planning a wedding, or saving for a down payment on a starter home can be expensive. GICs may offer far greater returns than a standard savings account and help goal-getters reach their financial targets faster.
Younger investors or those without an RRSP withdrawal strategy may find a tax-free savings account (TFSA) or another unregistered account to be a more suitable place to hold their GICs. These types of accounts are usually better for short term goals.
First-time homebuyers can take advantage of GICs within their RRSPs while they wait for a buying opportunity. During this waiting game, RRSP contributions are tax-deductible. So, prospective buyers can benefit from a tax break and enjoy extra savings.
Then, when it’s the right time, account holders can withdraw up to $35,000 from their RRSP using the HBP to buy or build a qualifying home.
Parents (and their teenagers)
While the average cost of an undergraduate or graduate degree decreased in Ontario in the 2019/2020 academic year, many students across the country saw tuition increases, according to Statistics Canada.
Dentistry students saw the highest average tuition costs in the 2019/2020 academic year at $21,717. So, if you have a future dentist in the family, you may want to prepare for the imminent tuition bill financially.
Related read: Beyond RESPs: How to Save for Your Child’s Education
Dentistry student or not, post-secondary education is costly. Parents may want to incorporate GICs into their children’s education savings plan as they study their way to their high school graduation and their first year at college or university.
Adults looking to go back to school can also use their RRSPs through the LLP to finance full-time training or education.
Related read: Career Do-Over: Everything You Need to Know About the Lifelong Learning Plan
For those nearing retirement, investing in GICs can safeguard retirement funds for a shorter investment horizon — allowing them to take advantage of higher interest rates.
After retirement, people can still invest GICs in their RRSPs until the last day of the year they turn 71. At this time, account holders must convert their RRSPs to either a registered retirement income fund (RRIF) or annuity. The investments, like GICs, stocks and bonds, will transfer to the RRIF. The user can also make new investments in the account.
Choosing the right GIC
Types of GICs
There are two main types of GICs, registered and non-registered; however, there are different interest rates available, including fixed rate, variable rate and market-linked GICs. Each one offers varying degrees of return.
- Registered GIC: Grow your savings in a registered account like your RRSP, TFSA, or registered education savings plan (RESP) to avoid paying taxes on interest earned.
- Non-registered GIC: Although you will owe tax on the interest you earn, you won’t be subject to contribution rules imposed on most registered accounts.
Your GIC will also have one of these two features:
- Redeemable or cashable GIC: These types of GIC’s allows you to access your funds after a period (usually 60-90 days), and there is generally no penalty for early redemption after this time. However, you will only receive interest in that period, not the full term.
- Non-redeemable GIC: Usually, funds are locked in for a specific period, and you may incur penalties if you need to access the funds early. Although this type of account is less flexible, it may offer higher interest rates in return.
It is essential to compare these details when choosing an account, so you can access your funds when you plan to.
What are the benefits and disadvantages of GICs?
In short, GICs can increase your savings, but they also have minor disadvantages.
Benefits of GICs
- You will never lose your investment as your principal is secure.
- Features are flexible for short- and long-term goals.
- Low-risk investments can help balance your portfolio.
Disadvantages of GICs
- May offer lower returns compared to high-risk investments.
- Money can be locked in and may face penalties for accessing funds early.
- Non-registered GICs are subject to taxation.
A GIC may or may not be right for you, depending on your goal.
GICs can balance your portfolio and secure your funds, particularly during times of uncertainty, like the COVID-19 pandemic. They may not offer the highest returns, but they are a sensible way to achieve your short- and long-term goals and guarantee your investment.
Make sure you choose the term and features that best suit your plans when comparing GICs. You’ll want to ensure you can access the funds when you need them and avoid any penalties.