When setting aside money for the future, making sense of your investment options in Canada can be confusing, especially when you're confronted with acronyms like GIC and RRSP. When trying to understand these two terms and how they relate to each other, know that an RRSP is specifically designed to help you save for your golden years. An RRSP may or may not include GICs, depending on your risk profile and investment goals.
GIC stands for Guaranteed Investment Certificate. When you buy a GIC through your financial institution, you agree to lend your money to the bank for a certain period of time in return for interest. The bank makes money by lending your cash or investing it elsewhere for an even higher rate of return. There are two main types of GICs: fixed income, and index or market-linked. Fixed-income GICS provide a guaranteed return in exchange for your investment, while index or market-linked GICs pay based on the performance of the markets, referencing a stock exchange index to decide how much you get paid. While the first type of GIC is lower-risk and the second type generally has the potential to pay higher interest, both types of GIC guarantee that your principle -- the amount of money you invest originally -- is safe, no matter what happens with the markets.
RRSP stands for Registered Retirement Savings Plan, and is a program designed by the Canada Revenue Agency to help Canadians save for retirement. When you open an RRSP, the plan gets linked to your records with the Canada Revenue Agency. By contributing to the plan, you can reduce the amount of income taxes you owe each year. A certain amount of the money you put in your RRSP is tax deductible, up to an annual limit. RRSP funds grow tax free. You only pay taxes when you start making withdrawals. An RRSP usually includes a number of different types of investments, including mutual funds, traditional savings accounts, stocks and GICs. To start an RRSP, speak with an adviser at your financial institution.
Generally, the Canada Revenue Agency taxes GIC interest income at the same rate as regular employment income, making the GIC tax rate higher than the rates for many other types of investments. However, when you buy GICs as part of an RRSP, the interest you earn doesn't get taxed until you start making withdrawals. The tax rate you pay upon withdrawal is the same that you pay on income made through other types of investments, and varies based on where you live and how much you take out at one time.
To buy a GIC, whether you're looking to purchase one on its own or as part of an RRSP, you need to have at least $500 to invest. GICs lock your money in for different amounts of time. The longer you're willing to commit your cash to the bank, the higher the interest rate you should expect. Understand the consequences of early withdrawal before you invest, since some GICs force you to forgo interest or pay fees for early access to your money. GICs offer a smart way balance risk from stocks and mutual funds in an RRSP portfolio. Laddering GICs, or purchasing GICs that mature at different times, helps maximize your returns in the face of rising and falling interest rates.
- "The Globe and Mail"; Chapter 1 -- What is a Guaranteed Investment Certificate (GIC)?; March 2010
- "The Globe and Mail"; Chapter 2 -- What Choices Do I Have When I Buy a GIC?; March 2010
- "The Globe and Mail"; Chapter 3 -- What Will it Cost Me to Own a GIC?; March 2010
- "The Globe and Mail"; Chapter 4 -- How Risky is a GIC?; March 2010
- "The Globe and Mail"; Chapter 5 -- Is a GIC a Good Choice for Me?; March 2010