Would you Like a GIC with That Cup of Tea?

When you think Guaranteed Investment Certificates, you make think of muted-tone flower-patterned granny panties or something boring like that. Or you might not. Maybe it’s just  me.

GIC’s can actually be a very good tool in the fixed income portion of your portfolio.  Just like granny panties are a staple in your wardrobe (disclosure: I personally do not own any pairs).   Although GIC’s are predictable, sometimes predictable is good (as we learned from the market crash last year).

GIC’s can be non-registered, in your TFSA or in your RRSP.

I would recommend these be held in an RRSP or a TFSA because the interest income you get is 100% taxed at your marginal rate.  So if your tax rate is 35%, for every $100 you get, $35 gets taken back at tax time from the government.  Which sucks, IMO.

There are a few different types of GIC’s that you can get.

Cashable GIC

  • Often the rates are crappier because you can pull the money you invested out at any time (and banks don’t like you doing that)
  • As of writing, the current 1 year cashable GIC interest rate is 0.30%
  • In my opinion, if you’re thinking of a cashable GIC, might as well plunk your money in a HISA instead
  • They have varying terms (how long you want to hold the GIC)
  • Can be simple or compound interest

Non-Cashable GIC

  • Varying terms
  • Usually higher rates than cashable GIC’s because they’re locked in for the term amount.  For example at ING direct, the 1 year rate is 1.25%, if you hold it for more than 1 year, the interest rate is higher
  • You have to pay a penalty if you want to redeem them before the agreed date
  • If you need money in the short term, again, might as well go with the HISA (High Interest Savings Account) to avoid any penalties

Equity-Linked GIC

  • This is where the granny panties are kicked up a notch
  • The GIC is linked to the market
  • Still 100% principal protected
  • At maturity, you may get MORE than what a typical GIC would get you
  • The downside is that it  may not be cashable until at maturity

Escalator Rate GIC

  • Usually longer terms (like three to five years instead of one)
  • The rates increase for each year of the term (for example Year 1: 1.2% Year 2: 1.75% Year 3: 3.5%)
  • Compounded interest is used
  • Usually for the last year of the term, they use a hot interest rate to entice you
  • Can be cashable but you are tempted not to cash out because of the said hot rate

What do you think of GIC’s?  What percentage of your portfolio includes GIC’s?  Do you agree that granny panties can be a staple in the wardrobe? (NOTE: No grandmas or granny panties were harmed in the making of this post)

About

Young is a writer and former owner of Young and Thrifty and the main "twitter' behind Young and Thrifty's twitter account. She lives in Vancouver, BC and enjoys long walks on the beach, spending time with her anxious dog, and finding good deals. If you like what you read, consider signing up for email updates.

4 Responses to Would you Like a GIC with That Cup of Tea?

  1. I’ve had a large proportion of GICs in my RRSPs, mainly out of sheer inertia, as an automatic buy in February. It did come in helpful when my mutual fund RRSPs took a plunge the last couple of years. Do need to come up with a more considered balance of investments.

    BTW I’ve heard of grannie undies being referred to as “fullback”, which seems sporty in the extreme. Beige, large undies are good to wear under light, floaty skirts or wrap dresses which might unwrap in the wind.

  2. I think GIC’s are way too conservative and many people are scared into using GIC’s.

    instead of buying a GIC for whatever bank why not buy a corporate bond from that same bank.

    first if you have more than 100,000$ in that bank. more than the CDIC limit then a GIC is no more secure than a corporate bond of that bank. yet pays you only a fraction for your risk.

    second, lets say you invest in corporate bonds at say TD instead of a GIC at TD. how much safer are you?

    you will only loose principal from the bond if TD goes into bankrupcy. and if that happens what do you think is the state of the economy at that point? the state of the dollar? it would be a situation of total economic chaos. so bad that even your canadian dollars in cold hard cash is risky anyway.

    • @AnnieA Yes, balance is key (or is that quote “Moderation is key”). GIC’s are great as a small part of your portfolio if needed, though again, the rates have been comparable to high interest savings accounts. Though if I kept all the money that I have invested, I would be about $10,000 more well off… but we DID have an economic meltdown in 2008. =)

      @dividendlover Thanks- I’ll check out your post. I only have a small amount of money invested in GIC’s myself, you’re right, there are other fixed income investments out there that do pay out more than GIC’s.

Leave a reply

Headline Name: Email: subscribed: 0 We respect your privacy Email Marketingby GetResponse