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RRSP GICs and TFSAs: A Short Term Savings Boost

Feb. 25, 2013
3 mins
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Looking for an effective, tax-free way to grow your money? RRSP GICs (Guaranteed Investment Certificates) might be just what you’re looking for. Compared with mutual funds and exchange traded funds (ETFs), GICs are the plain vanilla of investments. They come in all different shapes and sizes – some are redeemable and others are non-redeemable, meaning funds are locked in for the term. GICs also vary in the length of term, from as short as 30 days to as long as 10 years. If you’re saving for a short-term goal, GICs offer a safe place to park your money and earn a decent return.

All About GICs

Typically, longer term GICs offer a higher return on interest, an incentive that rewards the investor for locking in their money, while short-term GICs offer interest rates similar to high interest savings accounts. However, while you’re guaranteed a larger rate of return, long-term GICs can be riskier than shorter-term GICs – if you choose a five-year GICs, rates could increase while your money is tied up at a lower rate. If you redeem your GIC early, however, you’ll most likely lose all the interest you’ve earned.

Short-Term vs. Long-Term GICs

GICs are ideal for short-term investing – they provide a safe haven for your money while you decide where to invest it. Deciding on a long or short-term option depends on your savings goals. Short-term GICs , such as 30, 60 or 90 days, are great for accumulating funds fast for a big ticket purchase, such as a vacation, new car, or even a down payment on a mortgage.

As the name suggests, GICs provide a guaranteed payout – you’ll know ahead of time what you’ll receive once the term is over. Unlike mutual funds, their value doesn’t fluctuate with market prices – you’ll know your money is safe and sound. GICs also form a solid cornerstone to the portfolio of many investors. They offer a liquid, yet stable rate of return. While current interest rates are low - barely keeping up with the rate of inflation - they remain a good option for parking a portion of your money.

RRSPs and GICs

TIP: The deadline to make your final RRSP contribution is generally early March. Click here for information on the deadline for this tax year.

If you’re unsure what type of investment you’re going to use for your retirement savings, GICs offer an excellent option, and they'll earn a decent rate of return to boot. Lenders typically offer attractive GIC rates during RRSP season to lure new investors, so you might as well take advantage of them. RRSPs are a great way to shelter interest earned on your GICs. While investment income like dividends and capital gains receive preferential tax treatment, GICs are fully taxed at your marginal tax rate.

RRSPs protect your investment gains and let your interest compound tax-free - a boost that'll have you well on your way to final freedom. RRSPs aren’t the only place to park GICs – TFSAs are also a great choice. Although you don’t receive a tax deduction like RRSPs, you don’t pay any tax when you withdraw money.

Should You Use a TFSA or RRSP?

There's growing debate around which tax-free savings product is better - but there's no hard and fast answer. The right retirement strategy comes down to your age; how many years do you have to invest and save for retirement, and how many years do you have left in the workforce?

There are pros and cons with both products: you won't receive an income-tax deduction for placing your funds within a TFSA, but you'll be able to access your cash at any time, for any reason, unlike an RRSP. However, any returns on investments placed within either plan will grow tax free.

Sean Cooper

Sean Cooper is the author of the new book, Burn Your Mortgage. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Financial Journalist, Speaker and Money Coach, his articles and blogs have been featured in publications such as The Toronto Star, Globe and Mail, Financial Post, Tangerine: Forward Thinking blog and TheDot. You can follow him on Twitter @SeanCooperWrite.

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