Should I Use GICs In My TFSA?
GICs in a TFSA
If you want to invest in a Guaranteed Investment Certificate (GIC), one place you could use it is in a TFSA. There are several benefits to doing so. Tax-sheltered growth is a benefit that is great for any investment. But, arguably, it’s best to invest in GICs instead of higher-yielding investments as the return is guaranteed.
Let’s go over what GICs are, how they work, and whether they’re the right choice for you in a TFSA.
What Are GICs?
Guaranteed Income Certificates (GICs) are offered through banks and trust companies. They offer consistent, guaranteed returns, making them popular for long-term savings and retirement accounts. Because they are insured by the Canadian government up to a certain amount, you can invest without worrying about losses.
A GIC is effectively a loan you give to the bank. The bank uses the money to provide loans to their customers at higher interest rates than your GICs yield to you. The interest you receive from your GIC is the bank’s payment for your loan to them.
Banks and trusts profit from your GICs by giving loans to customers at higher interest rates. If the average GIC interest rate a bank pays out is 2%, and the average loan rate is 5%, the bank makes the 3% difference in profit.
GICs come with rules, however. You have to deposit money into a GIC for a set amount of time. During that time, the bank or trust sends you regular interest payments. Once the GIC matures, you receive its principal as well.
Benefits Of GICs In A TFSA
GICs that are held in your TFSA are funded through after-tax dollars. So, the money you make from GIC interest will not be taxed. You can withdraw your GIC at maturity, and you can keep your gains without worrying about taxes.
The “Guarantee” in GIC matters. Unlike most investments, your GICs are eligible for CDIC insurance. That means balances up to a certain amount are insured.
Drawbacks Of GICs In A TFSA
GIC interest rates can be much lower than other investment returns. While they typically beat high-interest savings account rates, they are easily bested by other investments.
Also, your TFSA comes with low contribution amounts relative to an RRSP. So, if you want to make the most out of that little space, a GIC won’t do it.
If you need to access your money immediately, GICs do not offer a great deal of liquidity in case of an emergency.
Summary Benefits and Drawbacks
|Advantages: GICs in a TFSA||Disadvantages: GICs in a TFSA|
|Tax Free Growth||Lower Returns|
Should I Consider Adding GICs To My TFSA?
GICs are normally a good bet as their income is guaranteed.
While GICs are great, they aren’t the best option for a TFSA. Relative to other tax-advantaged Canadian accounts, TFSAs have low contribution limits. With around $6,000 per year to invest tax-free, GICs will take up space that could be better taken with other investments. Relatively low-risk ETFs that track a major stock index, could grant as much as 9% per year or more.
Amid the Covid pandemic, GICs are not yielding as much as they were before. But most of the time, GIC returns barely keep up with inflation. At the beginning of 2021, few GICs could meet even that low standard.
We aren’t trying to say that you should completely write off GICs, if you want to use your TFSA. But GIC returns are quite low, as are the contribution limits for your TFSA. So, you might want to consider investing in GICs using a different account. Then your TFSA can serve its purpose of saving you from taxes by using other investment types.
What to do now?
- We supply you with the best TFSA interest rates and other eligible investments in Canada as our brokers represent all the best financial institutions in Canada. For personal assistance on your TFSA please use our TFSA Form.