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What Is a Guaranteed Investment Certificate (GIC)?

·7 min read
Guaranteed Investment Certificate (GIC)
Guaranteed Investment Certificate (GIC)

A guaranteed investment certificate (GIC) is a financial product that offers low-risk and a guaranteed rate of return. Don't confuse it with a guaranteed investment contract, which also uses the same GIC acronym. Guaranteed investment certificates are sold by Canadian banks, credit unions and other financial institutions and can be insured by the Canadian Deposit Insurance Corporation (CDIC). People in the U.S. may be able to buy GICs if they have an account through a Canadian bank.

Use SmartAsset's free tool to connect with financial advisors who serve your area.

What Is a Guaranteed Investment Certificate (GIC)?

A guaranteed investment certificate is a type of time deposit account. When you purchase a GIC, you're agreeing the allow the bank or credit union the use of your money for a time period. During that time period, the bank or credit union will pay interest back to you.

GICs typically offer fixed interest rates so investors have a predictable rate of return, though banks can also offer variable rate options. The longer the term, the higher the interest rate may be while shorter-term GICs may offer lower rates. Once the GIC term is over, you'll be able to withdraw your initial deposit along with the interest earned.

If you're trying to compare GICs to a U.S. equivalent, they're similar to both certificates of deposit (CDs) and bonds. With CDs, you're agreeing to save money with your bank or credit union for a certain period of time. Once the CD matures, you can withdraw the money you deposited and the interest earned. With bonds, you're lending the bond issuer your capital and they, in return, pay you interest for the use of your money.

How a Guaranteed Investment Certificate Works

A GIC works by guaranteeing the money you deposit into it and paying interest over a set period of time. Again, it's common for GICs to have a fixed term with a fixed interest rate so you'll know exactly how much you'll get out of your investment. If you were to deposit $2,000 into a two-year GIC with a 2% interest rate, for example, you'd be able to collect $2,080 at the end of the term.

A guaranteed investment certificate can be cashable or non-cashable. With a cashable GIC, you'd be able to cash in your certificate before the term ends. With a non-cashable GIC, you'd have to wait until the term is up to withdraw the money. If you redeem a non-cashable GIC before the term ends the bank could charge a penalty. This is similar to the early withdrawal penalty that banks in the U.S. can charge for withdrawing money from a CD prior to maturity.

In terms of how rates for GICs come about, this can depend on the financial institution that's offering. GIC options can include:

  • Fixed-rate investment certificates

  • Variable-rate certificates

  • Market-linked certificates, which use stock market indexes

  • Foreign exchange certificates, which allow purchasers to earn returns on foreign currency

A guaranteed investment certificate can be held inside a registered or non-registered account. Registered accounts enjoy tax-deferred or tax-sheltered status under Canadian tax law. So if you were to hold GICs in a registered account, earnings would be taxed once the money is withdrawn. Earnings from GICs in non-registered accounts are taxed yearly the same as any other type of income.

Pros and Cons of Guaranteed Investment Certificates

Guaranteed Investment Certificate (GIC)
Guaranteed Investment Certificate (GIC)

There are some advantages of GICs, chiefly the fact that they're low-risk and can provide a specific rate of return. Other pros include:

  • Low fees or no fees at all

  • Tax-deferred growth (when GICs are held in a registered account)

  • Variety of terms to choose from

  • Option to choose a cashable GIC if you think you might need to withdraw money early

  • Variable-rate GICs could yield higher rates

There are, however, some potential downsides to consider. Here are some of the reasons you may think twice about GICs:

  • The minimum investment may be $500, $1,000 or more

  • Withdrawing money from a GIC early could trigger a penalty

  • Time deposit requirement means you'll need to leave the money alone to get the maximum benefit

  • Interest rates offered by GICs may not keep pace with inflation

  • Earnings are taxable on GICs in non-registered accounts

Depending on your savings goals and needs, a GIC may or may not be the best fit. Comparing them to other savings options, such as high yield savings accounts, money market accounts or even a taxable brokerage account can help with deciding where to keep money you don't plan to spend right away.

How to Open a Guaranteed Investment Certificate Account

If you want to open a GIC, you'll first need to find a bank that offers them. Again, that means looking at Canadian banks, trusts and other financial institutions as these are Canadian products. If you live in the U.S., it may be possible to open an account at a Canadian bank. But you'll need to meet any requirements the bank has for doing so.

Once you're able to connect with a bank offering GICs, the next step is comparing the options. This includes looking at:

  • Interest rates

  • Fixed vs. variable rate GICs

  • Minimum deposit requirement

  • Investment terms

  • Interest payment schedule

If you're looking to open more than one account, you might consider building a GIC ladder. A GIC ladder is similar to a CD ladder or a bond ladder, only you use multiple GICs to build it.

When building a ladder, you can choose a selection of GICs with different interest rates and terms. So if you have $10,000 to invest, your GIC ladder might look like this:

  • GIC #1: $2,000 investment with a 1-year term at 0.75%

  • GIC #2: $2,000 investment with a 2-year term at 1.00%

  • GIC #3: $2,000 investment with a 3-year term at 1.25%

  • GIC #4: $2,000 investment with a 4-year term at 1.50%

  • GIC #5: $2,000 investment with a 5-year term at 2.00%

As each certificate reaches the end of the term, you could roll it over into a new GIC. GIC laddering allows you to continue earning interest on your money while giving you the option to withdraw money at the end of a term instead of rolling it over should you need to.

Bottom Line

Guaranteed Investment Certificate (GIC)
Guaranteed Investment Certificate (GIC)

A guaranteed investment certificate (GIC) could help you to achieve your financial goals if you're looking for a safe option with a reliable rate of return. If you're not able to open a GIC with a Canadian bank, you can still pursue a similar strategy by opening one or more CD accounts with a bank in the U.S.

Tips for Investing

  • Consider talking to a financial advisor about GICs and whether they're something you should be investing in. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.

  • GICs and their CD equivalents can offer safety and returns but it's important to consider the value of a diversified portfolio. Opening a taxable brokerage account, for example, can allow you to invest in stocks, exchange-traded funds (ETFs), mutual funds or even cryptocurrency. Each of these investments can carry a higher degree of risk compared to GICs or CDs but there's also the potential for greater returns, which you may need in order to achieve your financial goals.

Photo credit: ©iStock.com/ARMMY PICCA, ©iStock.com/Boonyachoat, ©iStock.com/Andrii Zastrozhnov

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