Guaranteed investment certificates, or GICs, have long been considered an ideal choice for short-term savings goals. And when interest rates and financial uncertainty are both on the rise, like they have been since early 2022, reliable investments like GICs become even more attractive.
But what about long-term financial goals? Can GICs be used to save for something like retirement?
Yes, they can. One way to transform a GICs into a long-term savings tool is to hold it in a registered retirement savings account.
GICs vs. RRSPs
A registered retirement savings plan is a government-registered account designed to help Canadians save for retirement. As a registered account, it comes with tax benefits: The tax on any RRSP contribution is deferred until money is withdrawn, typically in retirement.
A GIC is a type of investment. Money is deposited with a financial institution for a predetermined period of time and guaranteed to earn a fixed rate of interest. (Although some GICs do have variable interest rates.)
Once the GIC term is up and the investment has matured, you get the initial amount back plus the interest earned. But if you try to break the contract and withdraw the money early, you will be penalized. GICs can be held in registered or non-registered accounts.
How to hold a GIC in an RRSP
GICs can be purchased from banks, credit unions and online-only banks. One isn’t necessarily better than the other, so shop around for the best rates and make sure the financial institution you’re buying your GIC from is insured.
You will need to make a minimum purchase,
(usually $500, although it varies by financial institution) and sign a contract that states you will keep your money in the GIC for a certain length of time. When it’s time to choose the type of account in which you want to hold the GIC, you can opt to put the GIC in your RRSP.
Why hold GICs in an RRSP?
A benefit of holding GICs in your RRSP is that you won’t be taxed on the interest you earn — at least, not immediately. An RRSP GIC is tax-deferred, so you’ll pay taxes when you withdraw the money, usually when you retire.
Because RRSPs are designed to help you save for retirement, you can’t simply cash in an RRSP GIC and access the money when the termis up. The money has to stay in your RRSP or you will be penalized for an early withdrawal. Because of this rule, it doesn’t make much sense to choose a cashable or redeemable RRSP GIC; a non-redeemable GIC might be a better option.
If the main goal of choosing a GIC is to save for retirement, then an RRSP GIC is an option worth considering. But if you might need to access the money sooner, consider holding GICs in a tax-free savings account, a Registered Education Savings Plan, or even a non-registered account. Just remember that there are no tax advantages when holding investments in a non-registered account.
Pros and cons of RRSP GICs
Holding GICs in an RRSP has benefits, but it may not be for everyone. Here are the main pros and cons to be aware of:
- RRSPs allow your money to grow tax-deferred, which means you can earn more interest over time.
- GICs are relatively safe because they’re guaranteed, which means you won’t lose any of your original investment.
- Contributing to an RRSP can lower the amount of income tax you pay while you’re still working.
- Tax-deferred does not mean tax-free. You will eventually pay taxes on your RRSP withdrawals.
- GICs may offer lower returns than other RRSP investment options.
- Your money is locked in. Even when the GIC has matured, you shouldn’t withdraw the funds since they’re part of your RRSP. Withdrawing before retirement could result in penalties.
- RRSPs have age and contribution limits to consider.
Frequently asked questions about RRSP GICs
Yes, but it’s not necessarily advisable. Withdrawing funds from your RRSP before retirement will trigger a withholding tax, and the amount withdrawn will be considered taxable income for the year. If you want to purchase GICs with a registered account and be able to access your GIC investments once they mature, consider holding them in a TFSA.
An RRSP GIC is a guaranteed investment certificate held in a registered retirement savings plan. Investing in GICs in this way means adhering to RRSP tax and contribution rules.