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What is a GIC and is it Something I Want?

I received this question from a reader. She is a teacher who makes just over 80K annually and has a fully indexed pension as well as a healthy amount of RRSPs. She is looking for a place for her short term savings.

What is a GIC and is it something I want to purchase? If so, how many? Why are they good and/or bad? My brother has them and claims I should too, but when I asked why all I heard was “blah, blah, blah” :)

A GIC is an acronym for “Guaranteed Investment Certificate”. It’s an investment, like a savings account where the bank says to you “If you put money into this account and don’t touch it for the time specified, we guarantee that we’ll pay you this percentage of interest.” It’s an amount of money you agree to loan to a financial institution and they agree to pay you a specified amount of interest in return.

So for example, let’s say if you had $1,000 and wanted to put it into a GIC with ING.

If you put in $1000 after one year you’d have $1012.50. They would pay you a guaranteed rate of 1.25% if you kept it in for the whole year.

If you put in $1000 for 5 years, at the end of 5 years you’d have $1159.27. You are keeping it in for 5 years so they are paying you 3%.

GICs are safe and secure investments that have very little risk. In the case of ING, if you do take out your money early, you still get all your money back. They just reduce the interest to 0.5%. Some banks don’t allow for early withdrawal. Some have penalties and others allow you to take your funds out at any time but don’t give any interest if you take it out early.

You don’t really buy them. You set up an account, deposit money into it and agree to keep it in there for a specified time depending on how long until you need the money and how much interest you’d like to make. After the term is over, the money gets put back into your regular account with the interest it made.

GICs are good because they are safe and secure and you never have to worry about losing money.

They aren’t good because they don’t make enough interest to keep up with inflation. They are a terrible savings plan for retirement but work well for shorter term savings goals (a down payment on a house, a car, a vacation) where you know you’re end goal date and you want a better savings rate than a regular savings account.

They are also not great for someone in a high tax bracket (like you) because you are taxed on every penny it earns which means in effect, you’d be making a lot less than 1.25%.

Now that Canada has the Tax Free Savings Account (at a current rate of 3% at ING) this would be a way better plan for your short term savings goal.

It gives the same great rate. It’s just as safe and secure. You’re not taxed on any money it makes in the account. You can take it out whenever you like. You don’t have to wait 5 years. The only glitch with the tax free savings account (TFSA) is that you can only deposit a maximum of $5000 a year. Not much of a glitch if you ask me! And if you take it out one year, you get to put it all back in the following year plus another $5000 if you like.

To summarize, a GIC is a safe secure investment with a guaranteed rate of interest but you’d be taxed on any earnings it makes and you’d have to keep it in for a specified period of time.

A TFSA (Tax Free Savings Account) is a safe secure investment with the same great interest rate but the interest earned is tax free and yours to keep. You can take it out whenever you need it! You can however hold your money in a GIC within the TFSA. This might be more attractive if the rate for the GIC was higher than the regular rate for the TFSA.

For your situation, I see no reason for a GIC at this time but I’d highly recommend the TFSA.

Do we have anyone out there that loves GICs as much as our reader’s brother? Can you give us any other advantages to a GIC that I might have missed?

Kathryn works in public relations and training for a non profit. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Her passions include personal finance and adult education. Kathryn, along with her husband and two children live in Ontario.

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About the author: Kathryn has been a staff writer for MDJ since January 2009. During the day she works in an office. In her off hours, she volunteers as a financial coach helping ordinary Canadians with the basics of money management. Kathryn, along with her husband and two children live in Ontario.

{ 24 comments… add one }
  • Ray August 18, 2009, 8:31 am

    I find most people who get GIC’s are either elderly who are scared of fluctuations and like the safety and those who do not know much about investments and are always encouraged by the teller to purchase GIC’s.

    Like mentioned GIC’s are not a great long-term investment, if you take inflation and taxes into account you have a negative rate of return.

  • Kirk S. August 18, 2009, 9:37 am

    There will be an increase in safe bets because of the market crash in the last year. 3% should beat inflation, and in a tax-free environment (TFSA or RRSP) would be good as a stabilizer. This isn’t for 90% of your investments though, only a small part.

  • mwonln August 18, 2009, 12:14 pm

    A lot of Canadians love GICs because they are safe and boring. I personally do not like having my money tied for any amount of time so I avoid them…

  • earl August 18, 2009, 12:20 pm

    You forgot to mention that in a RRSP account the GIC investment is not taxed as well provided it is not withdrawn from the account. It will be taxed as any other investment in the account at the individuals personal taxation rate when it is withdrawn. In general interest bearing investments are best put in RRSP or TFS accounts. Dividend bearing accounts are generally best in non-registered accounts.

  • cannon_fodder August 18, 2009, 12:47 pm

    A GIC might have a place in someone’s portfolio if you can buy it at a peak of the interest rates with the fortunate guess of seeing the rates (and hopefully inflation) drop significantly and stay there.

    Right now I think a GIC would be one of the worst places to put your money since you are essentially locking it in at a rate that can almost be achieved with a high interest savings account and all the flexibility it provides.

    FT – you may also want to mention anything about whether a GIC is guaranteed by the CDIC or equivalent.

  • Sampson August 18, 2009, 12:57 pm

    I agree with c_f that the high interest savings accounts offered by many institutions are beginning to replace GICs for many due to their flexibility.

    Over the past 15+ years of my investing ‘career’, I always avoided GICs favoring higher risk investment vehicles. However, I am really starting to understand/view the benefits of incorporating GIC ‘ladders’ as the main cash component of my portfolio.

    Longer term GICs still give returns much higher than high interest savings accounts (find any account that will give >2% interest for the entire year – TFSA promotion aside). The ladder allows a portion of the cash to become available annually for rebalancing/purchasing equities, and it smooths out/reduces some interest rate risk since you can lock into higher rates every year if they are rising.

  • Elbyron August 18, 2009, 12:59 pm

    I agree that 3% should beat inflation, but the ING TFSA is only at 3% temporarily, in order to attract business. This October they’ll be lowering that rate so it’s not going to help you keep up with inflation for long! The best the big banks can offer is 1% so I’d expect ING will set their rate slightly higher, maybe 1.1% or 1.2%.
    The advantage that a GIC has over the ING TFSA account is that the interest rate is fixed, so you know what you’ll be getting paid. Neither of them pays enough to beat inflation. I intend to use my TSFA to hold index funds – a much more profitable long-term investment with relatively small risk.

  • Jackie August 18, 2009, 1:06 pm

    YIKES!!! GIC’s are safe and secure only as long as the institution holding the GIC remains solvent. Please, investors, educate yourselves to increase ‘safety’. Find out what’s covered, and more importantly, what’s not covered by the Canadian Deposit Insurance Corporation (CDIC) at their website http://www.cdic.ca/. Also, get detailed information from your bank advisors.

    Here’s my lay-person’s understanding of CDIC GIC coverage limits:
    a) maturity term of up to 5 years.
    b) $100,000 for each ‘person’ (a GIC held jointly is considered ‘one’ person)
    c) $100,000 under each ‘issuer’. Comply with the $100,000 limit by either spreading GIC’s across a number of different banks or by staying with the same bank and utilizing that bank’s different issuers. Scotiabank, for example has two issuers of which I’m aware, the Bank of Nova Scotia and the Bank of Nova Scotia Trust Company.

    Any cash portion should also be factored into the $100,000 limit.

  • Ms Save Money August 18, 2009, 2:05 pm

    The GIC is another version of the Certificate of Deposit?

  • Astin August 18, 2009, 2:28 pm

    As has been mentioned the 3% at ING is only temporary, and not guaranteed. So if you put $5k in today, you’d get 3% until October, and then the lower new rate after that point. The 3% 5-year GIC option is 3% for 5 years that won’t drop. And does exceed inflation, especially tax-free.

  • Germack August 18, 2009, 2:37 pm

    I like GIC and every well diversified portfolio should have them.

    Most investors would be even far better of by only investing their money in GICs/bonds and to not invest in equities at all, as recent Dalbar study has shown. The S&P 500 returned 8.35% over the last 20 years, however the average equity investor only earned 1.87%. If they would have put their money in a GIC they would be far better off.

  • Sampson August 18, 2009, 3:28 pm

    Germack, while I agree cash (whether in a GIC, or other investment) plays a critical role in a diversified portfolio, those oft quoted studies suffer from one problem, they assume a single lump investment at the beginning of the term.

    The reality is that people make deposits/investments in smaller chunks/pieces over the entire investment time-frame. Generalizations such as GICs perform better than equities don’t hold much weight. What if I was new to the market and bought into some indexes in March – you’d be hard pressed to find any fixed income instrument returning >20% in the span of 6 months.

  • Germack August 18, 2009, 4:08 pm

    Sampson, maybe I did not express myself clearly. Long-term equities should outperform GICs. No doubt about it. The problem is that most people invest very poorly in equities. Poor diversification, paying too much in fees, trying to time the market, buying high selling low etc. Because of all these things there rate of return is often below the rate of return they would have achieved with just GICs/bonds.

  • Elbyron August 18, 2009, 4:38 pm

    Such people who invest poorly in equities and suffer from those problems are simply just bad investors. There will always be bad investors out there, but that doesn’t mean most investors are better off with GICs/bonds. What it means is that the bad investors should learn from their mistakes and start diversifying, reducing fees, investing long-term, and avoid trying to time the market. They don’t need GICs to do this, they just need a brain!

  • Germack August 18, 2009, 5:08 pm

    Elbyron, the sad thing is that most investors are indeed “bad” investors and earn a rate of return below GICs/bonds as several studies have shown. Therefore the mayority of investors would be better of with just investing in GICs. Only very few investors invest in a buy and hold, low cost and diversified portfolio. These people will do well, however even these people should in my opinion always have some portion of their money in GICs/bonds

  • Kathryn August 18, 2009, 9:35 pm

    Great discussion!

    While I agree that most people on their own are ‘bad’ investors, I’m not sure if it’s lack of brain cells that is the cause. Financial literacy in Canada is at an all time low. People don’t want to ask for help for fear of looking stupid. Others like risk and don’t understand enough about investments to know that there are other options out there.

    My hope in writing this is that someone who thinks of this same question, might google it and find the article and the discussion.

    I would hate for them to think that in order to avoid being a ‘bad’ investor they should invest in GICs. I would rather encourage them to do some more research on low MER EFTs and / or low fee mutual funds. They aren’t for everyone but they do better than GICs in the long term and way better than ‘bad’ investments.

  • Kathryn August 18, 2009, 9:37 pm

    P.S. Good point about the 3% being a teaser rate. I should have mentioned that. My hope is that ING will continue to have one of the most competitive rates. Thinking it will stay at this level is unrealistic in light of the economic climate of the day but I’m still counting on ING having one of the better rates out there on the TFSA even when the teaser rate is gone. Only time will tell.

  • John August 18, 2009, 10:50 pm

    While I’m not a fan of the major chartered banks, I’m surprised at your choice of ING when buying a GIC. The Canadian banks provide jobs, evidenced on every street corner by their presence. ING provides few jobs for Canadians. Something to think about.

  • Chocolate Classic Tall Ugg Boots August 19, 2009, 12:38 am

    If you won’t need your money for one month or more, you may get a higher return with a GIC than with a bank account. Before you decide, compare how much you’ll get with a high-interest rate savings account.

  • Mark in Nepean August 19, 2009, 8:01 pm

    My two cents…

    Making $80,000 per year and has a fully indexed pension, then NO, you DON’T WANT a GIC.

    If you have extra cash lying around that you don’t want to spend in the short-term, find a nice high-interest savings account and park it there; or, as others have said, put the cash in a TFSA for a rainy-day.

    Otherwise, put the money in a long-term investment to have more fun money to play with, with your fully indexed pension!!!!!!!!! (must be nice :)

  • Ed Rempel August 19, 2009, 11:13 pm

    Hi Kathryn,

    Good article. We call GIC’s “Guaranteed Insufficient Cash”. We have not seen a single person save for a comfortable retirement with GICs.They are fine if you have lots of money and just want to keep it, but they are have little or no use if you want to grow money.

    GIC rates were high in the early 80s at 14% (5-year GIC), but inflation was 10% then, so even that would not have allowed anyone to save for a comfortable retirement.

    We agree with Ray that GICs are not useful as a long term investment. They are purchased mostly by older people and those not familiar or comfortable with invesing.

    If you look at protecting principal, then GICs are safe. But if you look at retirement income, then you will see GICs are very risky, because the risk of not having the retirement income you want is very high.

    Ed

  • 3uro_skillz February 7, 2012, 10:11 pm

    I love how I’ve read about the pros and cons to a gic, and am enlightened and grateful. Howeer, no one has elaborated on replacing the con with a pro and continue on. See, if a GIC isn’t the greatest to invest long-term, would anyone be so kind as to providing an example that is? Or is this just a secret so that only the rich stay richer haha.

  • Kaitlyn November 14, 2016, 2:55 pm

    I am a full time university student who has a pretty good part time job which allows me to put $500 biweekly into a TFSA. When i reached $1000 my banker advised me to buy my first GIC so I will have that money locked in until I graduate. I almost at $5000 in the TFSA now and she advised me to buy a new GIC each time I reach $5000 since I am a student and do not need that money readily available because I also save on the side in my regular savings account. Is this a smart decision to invest my money and get some return? I am only locking the GICs away fro three years.

    • FT FrugalTrader November 15, 2016, 2:38 pm

      Kaitlyn, do you plan on using the money in the near future? Or is this a retirement fund? If you plan to use the money fairly soon, then GIC’s or high interest rate savings accounts are a good bet. If this money will be held for the long term, then you may want to look at some conservative investment strategies like building a diversified index portfolio.

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