GICs (Guaranteed Investment Certificates) and savings accounts often provide low returns since these are generally safe investments with little to no risk.
GIC typically offers a higher rate of return than a savings account. Investments in a GIC usually cannot be withdrawn for a specific term length which ranges from 3 months to 10 years, whereas cash inside a savings account can be withdrawn anytime.
GIC and savings accounts have their own advantages and disadvantages which can be critical to one’s investment portfolio.
GIC vs Savings Account: Which is Better
A savings account is best for emergency funds or money that you might need anytime, since cash is accessible. On the other hand, GIC is best for low risk investments that you can afford to not be accessible for a couple of years to take advantage of a higher rate of return compared to a savings account.
In case you cannot afford your cash to be locked for several months to a couple of years, savings account may be best for you.
Overall, both savings account and GICs are best for low risk investments and a better alternative than holding a chequing account or physical cash.
Difference between a Savings Account and a GIC
| Savings Account | GIC | |
| Withdrawal | Anytime | At Maturity of Term Length you chose (3 months to 10 years) |
| Minimum | Typically no minimum | Depends on Financial Institution ($100 to $1,000 per term length) |
| Fees | Usually zero fees | Usually zero fees |
| Interest Rate (Income) | Rates can change anytime | Rates are fixed for the term you chose |
| Risk | Low | Low |
Disadvantages of GIC and Savings Accounts
- Inflation
- Lower rate of return
The rate of returns on GICs or savings accounts may not keep up with inflation (rising prices). With a 5% inflation rate, a $100 good last year now costs $105. With a 2% return on a GIC, the real purchasing power decreased by around 3%.
At the same time, GICs and savings accounts are better than holding cash where returns are zero. Using the same example, the real purchasing power of cash decreased by 5% in a year.
Returns on GICs and savings accounts are historically much lower compared to other investments such as stocks, ETFs, and mutual funds.
GICs and savings accounts are low risk investments which implies a lower rate of return. Higher rate of returns can be achieved by investing in stocks, ETFs, and mutual funds. However, these investments come with a medium to high risk.
For details about stocks, I wrote an article about how to start investing in stocks in Canada with as small as $100. I outline the actual step by step and what I think is the best way to get started from what I learned from more than 2 years of investing in the stock market.
Maximizing Returns on GIC
Rates are often higher on GICs with longer term lengths because funds are locked for a longer period of time. For example, rates are mostly higher on a 3 year GIC compared to a 6 months GIC.
When rates are high, a longer term length is also viable since this will lock in the higher rates for a longer amount of time. A short term GIC of 6 months is a decent option because anyone can always renew again after a GIC expires.
Another feature of a GIC (Guaranteed Investment Certificate) is that rates are guaranteed for the term length you chose. On the other hand, interest rate income on a savings account can either increase or decrease anytime.
Long-term GICs are advantageous when rates decrease in the future since your rates are locked in. At the same time, GICs can be disadvantages when rates are increasing, but you may not be able to take advantage of a higher rate if you are waiting for a 5 year GIC to expire.
Is GIC safe?
GICs are safe and a risk-free investment. In case your Financial Institution goes bankrupt, GIC investments are insured up to CA$100,000 by the Canada Deposit Insurance Corporation CDIC, as long as GICs are held in a CDIC member firm.
CDIC insures $100,000 per account category per member firm on most cash and cash equivalents. Should your combined savings account and GIC deposits in a single financial institution exceed $100,000, opening an account with another financial institution makes sense to be CDIC insured in case of a bankruptcy.
CDIC covers deposits in savings, chequing, and GIC accounts and term deposits. CDIC does not insure stocks, bonds, mutual funds, ETFs and cryptocurrencies.
(Source)
Can you lose money on a GIC?
GIC (Guaranteed Investment Certificate), by the name itself, is guaranteed and a person cannot lose money on a GIC unless a Financial Institution goes bankrupt and the firm is not a CDIC member. In case a CDIC member goes bankrupt, GICs and savings accounts are insured up to CA$100,000.
Because of this low risk and guaranteed returns, rate of returns on GICs are low.
Kinds of GICs
- Redeemable GIC
- Non-redeemable GIC
Non-redeemable GICs can only be withdrawn after the term length of a GIC. For the most part, rates are higher for long term GICs compared to short term GICs. Interests are paid either monthly, yearly, or sometimes at maturity.
By default, GICs advertised are non-redeemable GICs on a Financial Institution’s website unless otherwise stated.
Redeemable GIC is also called a cashable GIC. Funds inside a redeemable GIC can be withdrawn anytime. Because of this, rates are much lower on a redeemable GIC. Rates on a redeemable GIC are mostly similar or sometimes lower compared to rates on a savings account.
Rates are much higher on a non-redeemable GIC.
Taxes on GIC and Savings Account
Interest income on GIC and a savings account are taxable at your marginal tax rate unless a savings account or a GIC is held on a registered account such as a TFSA. For example, interest income from GICs inside a TFSA and income on a TFSA savings account are tax free.
However, deposits to a TFSA are limited to around $6,000 per year for most people.
Is investing in GIC worth it?
Investing in a GIC is worth it for people that seek a low risk and a low return on investment. Also, one should be willing to hold investments in a GIC for a couple of years since investments are not accessible for your chosen specific period of time. Longer terms often offer higher returns on GICs.