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GIC vs TFSA: Which investment is better?

Compare the pros and cons of GICs and TFSAs to find the best fit for your financial situation.

Guaranteed Investment Certificates (GICs) and Tax-free Savings Accounts (TFSAs) are two types of Canadian investment products. TFSAs are savings accounts that can hold many different kinds of investments, including cash, GICs, mutual funds, stocks and bonds. GICs, on the other hand, are restricted to holding cash and are only tax-free when held in a registered account like a TFSA, RESP or RRSP.

GIC vs TFSA: Which offers better returns?

It can be difficult to say whether GICs or TFSAs offer better returns since it really depends on your provider. GICs guarantee your principal investment but are only tax-free if they’re held in a registered account. If you lock in a fixed rate, you’ll typically get 1-3% of your investment back in interest. If you want the potential for higher returns, you can also opt for a variable rate GIC tied to the performance of the stock market.

As a general rule, TFSAs can be much less lucrative than GICs if they only hold cash. For this reason, most investors use their TFSAs to hold a combination of low-risk funds (like GICs and bonds) as well as high-risk equities (like mutual funds and stocks). With a good balance of holdings, a TFSA has the potential to net you a higher tax-free return than a GIC, while still balancing risk.

Open a GIC with EQ Bank

Lock in a 5.35% interest rate on a 1 year GIC. To fund your high interest GIC, you’ll need to open an EQ Bank Savings Plus Account first.

Which earns you more flexibility: a GIC or TFSA?

TFSAs offer much more flexibility than GICs because they give you a significant amount of contribution room. You can invest $6,000 per year (as of 2019), with up to $69,500 for the lifetime of your TFSA if you haven’t contributed to one yet in 2020. Start by checking the CRA website to learn more about how much you can put into your account.

The money you put in can be held in different types of investments, from low-risk GICs to high-risk stocks. You can also take money out whenever you want if it’s held in cash. You just need to be careful not to over-contribute to your TFSA in any given year or you may have to pay fees.

Non-redeemable GICs are a bit more strict about when you can take your money out and will typically charge a fee if you make a withdrawal before maturity. That said, cashable GICs will let you take your money out at any time without a fee. The only downside is that they typically offer lower interest rates than non-redeemables.

Pros and cons of GICs

Pros and cons may vary based on the type of GIC you choose to invest in.

Pros

  • Low risk. GICs offer a guaranteed return of your principal, with interest paid out at either a fixed or variable rate.
  • Easy to manage. Once you put money into a GIC, you don’t have to do anything with it until your term is up.
  • Steady return. If you go with a fixed interest rate, you’ll get a reliable and predictable return even if the stock market isn’t performing well.
  • No added fees. You won’t pay any fees unless you cash in a non-redeemable GIC early (in which case you’ll be charged a penalty).
  • Low minimum investment. GICs can be opened with investments as low as $100.
    Insurance is provided. Deposits up to $100,000 are insured by the Canada Deposit Insurance Corporation (CDIC).

Cons

  • Less flexible. Non-redeemable GICs will typically charge a fee or penalty if you have to access your funds early.
  • Low rate of return. You’ll usually earn less interest on a fixed rate GIC if the stock market is doing well (but you can look into market-linked GICs for higher returns).
  • Not adjusted to inflation. If you put your money in a GIC for a long time, you may end up getting interest rates well below the industry standard.
  • Gains may be taxed. Unless your money is in a registered account like a TFSA, RRSP or RESP, you will have to pay taxes on any interest you earn.

Pros and cons of TFSAs

Pros and cons may vary based on whether you are investing directly in cash or in other investments, like mutual funds or GICs.

Pros

  • Diversifies your investments. TFSAs allow you to hold a combination of investments, including high-risk equities (like mutual funds) and low-risk funds (like GICs and bonds).
  • Higher returns.If your TFSA portfolio is well-balanced, you should be able to get better returns while still managing your risk.
  • Long-term savings plan. You can put money into your TFSA every year and your account will never expire.
  • Gains are tax-free. Any interest you earn on your TFSA holdings won’t be charged tax.
  • Provides more flexibility. You can take money out of your TFSA at any time if it is held in cash. Just be aware that your contribution room may be affected in the short term.
    Cons

Cons

  • Low interest rates for cash deposits. You won’t get a good return on interest if you only put cash into your TFSA.
  • Holdings need to be managed.It takes time to manage the spread of investments you might hold in your TFSA.
  • Contribution room is restricted. You’ll only be able to invest around $6,000 per year in your account, across all of its holdings.
  • Penalty for over-contribution.If you exceed the maximum allowable contribution, you might be charged a fee until you take the money out.

Bottom line

GICs are a suitable option if you’re looking for a low-risk investment with a guaranteed return. TFSAs are better suited for investors looking to build a balanced tax-free investment portfolio that combines high-risk equities and low-risk funds. For the best of both worlds, you can look at investing in a TFSA GIC. Find out more about how all of these products work and learn how to compare providers to find the best deal.

Frequently asked questions: GIC vs TFSA

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