RRSP GIC guide

If you want to earn a decent return on interest with your Registered Retirement Savings Plan, then an RRSP GIC (or Guaranteed Investment Certificate) could be a suitable fit for you. These investments guarantee your principal and are a low-risk option for any diversified portfolio.

Learn how you can hold a GIC in your RRSP, why you might want to invest in an RRSP GIC and what you should be aware of before you lock your money in.

How does an RRSP GIC work?

Registered Retirement Savings Plans (RRSPs) are government-registered plans that let you earn tax-free interest on your retirement savings. RRSP GICs are investment products that can be held in your RRSP to balance out the risk in your portfolio. This is because they guarantee your principal, so you can rest assured that you won’t lose any money if the stock market goes down.

These investments can come with either a fixed or a variable interest rate, and are typically taken out for a specific period of time (called a term). Fixed rates offer a set return on interest over time, while variable rates (associated with market-linked GICs) offer a fluctuating amount based on market conditions.

Why invest in an RRSP GIC?

You may decide to invest your money into an RRSP to save for your retirement and defer your taxes in years where you earn a higher income. RRSP GICs can help to guarantee your principal and give you a favourable return on interest. They are typically invested alongside higher-risk equities and mutual funds to round out your portfolio.

One of the best things about GICs is that they allow you to choose how much risk you want to take, while still protecting your principal investment. A fixed rate GIC, for example, will offer a predictable return (around 2-3%) while a market-linked GIC has the potential to offer higher interest rates, but can also leave you empty handed if the market isn’t doing well.

Both fixed and variable rate GICs are a suitable option if you want to protect a portion of the money you’ve already invested in an RRSP as you reach the age of retirement. They can also be a good fit if the market isn’t doing very well, and you want to shelter your money from losses until conditions improve.

How to compare RRSP GICs

You can look at a number of factors to find the best deal on your next RRSP GIC.

• Fixed or variable rate. Fixed rates will offer a predictable return over the course of your term while variable rates will fluctuate based on how well the stock market is doing.
• Length of term. You can take out an RRSP GIC for anywhere between 3 months-10 years, with longer terms typically offering the best interest rates.
• Minimum investment. You may be required to invest a minimum amount to get your GIC up and running (often $500 or more).
• Redemption type. Cashable GICs will let you take money out at anytime without a penalty. Non-redeemables are a bit more strict about when you can redeem, but typically offer higher interest rates.
• Payment frequency. You should be able to choose how often you receive interest payments, with money paid out monthly, yearly or when the GIC matures.
• Renewal process. Some GICs will roll over automatically when they mature while others will need to be cashed out (and then re-invested if you want to keep earning).

Things to avoid with RRSP GICs

RRSP GICs are a safe and secure way to invest your money, but there are a couple of things you should be aware of before you take the leap.

• Lower return. If you go with a fixed term, you could end up making less than you might if you were to invest in higher risk equities or a market-linked product.
• Limited access to funds. It can be difficult to get money out of an RRSP GIC once it’s invested, especially if your GIC is non-redeemable.
• Unable to cope with inflation. GICs that are invested over longer terms could result in a net loss on your investment when you factor in the cost of inflation.
• Interest subject to taxation. Any interest you earn on your GIC will be taxed as part of your income when you withdraw the money in your retirement.

Bottom line

RRSP GICs are a suitable option if you’re looking for a tax-free way to invest for your retirement without losing your principal. Find out more about how these products work and learn how to compare providers to find the best deal.

Frequently asked questions about RRSP GICS

• What's the difference between an RRSP GIC and a taxable GIC?

  RRSP GICs aren't taxed by the federal government when they earn interest. This means you'll earn more with an RRSP GIC than you might be able to with a taxable GIC (which can skim up to 50% off your earnings).

  The money you put into your RRSP will also be tax-deductible in the year you invest, but you'll have to pay taxes on it when you withdraw the money.

• How can I get the best interest rates on my RRSP GIC?

  Your best bet if you want to lock in decent interest rates is to invest in a non-redeemable GIC over a longer term. It also helps to compare at least 3-4 providers to find the best deal.

• What happens if I take my money out before the GIC matures?

  Once your money is invested into your RRSP, it can't be withdrawn without a penalty. You should make sure you're ready to invest your funds for the long-term before you put them into an RRSP.

• Is it better to hold low-risk GICs or high-risk equities in my RRSP?

  There is no "one size fits all" way to invest since everyone will have different financial priorities and needs. That being said, most investors will hold a combination of equities, stocks, bonds, mutual funds and GICs in their RRSPs.

  In the beginning stages, it can make more sense to invest in higher-risk products that have the potential to earn higher interest rates. As you reach your savings goals, it can pay to transition into low-risk GICs to protect your money against market fluctuations.