Should I Use GICs In My RRSP?

GICs in a RRSP

One of the most common assets you’ll see advertised for an RRSP are GICs. Even the big banks claim that they are safe and flexible additions to a retirement savings portfolio.

RRSP Rates

• Short Term (30-270 days)
• Mid Term (1-6 years)
• Long Term (7-12 years)

Benefits to GICs

There are in fact several great benefits to GICs that make them particularly attractive for long-term investments. Given that your RRSP will also shelter your GIC gains from taxes until your withdrawals, they are worth considering.

So, let’s go over what GICs are, how they work, and the important benefits and drawbacks you should be aware of.

What Are GICs?

A Guaranteed Income Certificate (GIC) is an investment offered through Canadian banks and trust companies. They are more often used for retirement investments because they offer low-risk and consistent returns. They are low-risk in part because they are insured by the Government of Canada up to $100,000.

When you buy a GIC, you deposit your money in an account for a set length of time. During that time, you receive interest payments on your money. Then, you also receive the investment’s principal once it matures.

In effect, by buying a GIC, you are lending a bank money. Your bank then pays you in interest for the favour.

A bank or other financial institution will profit from your GIC by passing on that money to borrowers for a higher interest rate. For instance, if your GIC has an interest rate of 3%, and mortgage rates from your bank are 5%, your bank keeps the difference (2%) in profit.

Benefits Of GICs In An RRSP

Protection

The money you pay into a GIC is more protected than many other investments. Because they are guaranteed by name and definition, your full investment is eligible for CDIC insurance up to $100,000.

Diversification For Stability

Because of the guaranteed nature of GICs, you can rest assured you will receive a certain return.

If you opt to buy a fixed-rate GIC, you are guaranteed an interest payment when your GIC reaches maturity. Because of this, having GICs in your portfolio adds some safety and stability to a retirement portfolio. This means less portfolio volatility if stock markets, currencies, and commodities decline.

Variability

You have options for GIC investments. You can choose the term you want to buy into.

GICs vary by length, term, and redemption schedule. So, you can choose to lock your money in for longer, normally for a higher interest rate. Or, you can sacrifice potential interest income to keep your investment locked in for a shorter term.

Drawbacks Of GICs In An RRSP

Low Returns

The low risk that GICs offer comes with a downside as well. Their interest rates are lower than the returns you can get from stock dividends and other investments.

You also need to know that if interest rates fall, your GICs lose potential. In some cases, interest rates may fall low enough that they lag below the rate of inflation. In that case, you won’t be seeing much in returns, despite having to wait for maturity for the greatest rewards.

Redemption Penalties

If you wish, you are sometimes able to redeem your GIC investments before they reach maturity. However, doing so will normally result in a penalty. That penalty can cut deep into the returns you initially hoped for.

Lost Income

Again, we can reiterate that GICs are very safe and stable relative to higher-yielding investments. However, you’re paying a high cost for that safety.

As an alternative to GICs, you could invest in a mutual fund or lower-risk ETF that can yield far more. Of course, you subject yourself to more risk when doing so.

Summary Benefits and Drawbacks

Should I Consider Adding GICs To My RRSP?

GICs are a great stabilizing force for an investment portfolio. Due to their guaranteed returns, it’s no wonder that GICs are a popular choice of Registered Retirement Savings Plan RRSP asset. They are a good but sometimes underperforming part of a balanced portfolio. If you combine RRSP GICs with other income-yielding investments, you have a strong RRSP.

You can buy GICs for your RRSP if you don’t mind some of the shortcomings of GICs. As long as you don’t over-commit to them when interest rates fall short of inflation, they are a stabilizing asset.

What to do now?

• We supply you with the best RRSP interest rates and other eligible investments in Canada as our brokers represent all the best financial institutions in Canada. For personal assistance on your RRSP please use our RRSP Form.

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