RESP GIC guide

If you want to put money into a Registered Education Saving Plan, then an RESP GIC (or Guaranteed Investment Certificate) could be a suitable option. These investments offer a guaranteed return on your principal and are a low-risk addition to any diversified portfolio.

Find out more about how they work, why you should invest in one and what you need to know before you apply.

How does an RESP GIC work?

Registered Education Savings Plans (RESPs) are government-registered plans which can be used to help save for your child’s post-secondary education. RESP GICs are Canadian investment products that can be held in an RESP. The benefit of investing in an RESP-eligible GIC is that you’ll earn tax-free interest on any amount you put in without losing any of your principal.

RESP GICs are typically invested for a specific amount of time (called a term) and can earn either a fixed or variable interest rate. Most plans will automatically renew your GIC when it matures, up until the point that your funds are withdrawn from the RESP. From there, your money will be taxed in the student’s name (which often results in little or no tax, depending on their income).

The downside of these investments is that you might earn a lower return on interest than you would with a market-linked product. For this reason, many investors use GICs as a part of a balanced savings strategy, which combines guaranteed investments with higher-risk equities. This ensures that they can “play the market” with a part of their investment while still protecting a good chunk of their savings from fluctuations in the stock market.

Why invest in an RESP GIC?

RESP GICs are a safe and secure investment option because they are guaranteed to protect your principal. They are also more reliable and predictable if you choose a fixed rate, because you know exactly how much interest you’ll earn on the money you put in over the term of your investment.

These low-risk products are a suitable option if you want to protect a portion of the money you’ve already invested in an RESP as your child nears the age of enrollment in post-secondary education. They can also be a good fit if you want to balance risk in your portfolio, given that they protect your cash from unfavourable market conditions.

How to compare RESP GICs

RESP GICs come with a number of different features that you can compare to find the best deal.

• Fixed or variable rate. You may be able to earn a static return of 0.5-3% on your investment with a fixed rate GIC. Interest rates for market-linked GICs will fluctuate according to how well the stock market is doing.
• Length of term. Most RESP GIC terms range from 1-10 years, with longer terms typically offering better interest rates.
• Minimum investment. You may be required to put in a minimum amount of money to get your GIC up and running (often $500 or more).
• Redemption type. RESP GICs can be cashable or non-redeemable, but the money has to stay in the RESP even when the GIC matures in order to remain tax-free and avoid penalties.
• Payment frequency. You can choose to be paid interest monthly, yearly or when the GIC matures.
• Renewal process. Some GICs are renewed automatically on maturity while others will need to be cashed out or re-invested in a new product.

Things to avoid with RESP GICs

There are a couple of reasons you might want to avoid investing all of your funds in an RESP GIC.

• No liquidity. RESP GICs don’t offer a great deal of liquidity, which means you may have difficulty freeing up funds in the event of an emergency.
• Lower return. The interest you make may be lower than what you might earn by investing directly in the stock market (but you could consider a market-linked GIC to offset the lower return on a fixed rate product).
• Unable to cope with inflation. Long-term RESP GICs may not be able to keep up with inflation, leading to an overall loss on your investment.
• Interest subject to taxation. Any interest you earn on your GIC will be taxed to the student registered to the fund when the money is withdrawn from the RESP.

Bottom line

GICs are a suitable option if you’re looking for a low-risk investment with a guaranteed return. Find out more about how these products work and learn how to compare providers to find the best deal.

RESP GIC FAQs

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

  Unlike a taxable GIC, an RESP GIC doesn't charge taxes on the interest you earn until your money is withdrawn. Even then, the interest is charged to the student rather than the parent so the amount that needs to be paid is often negligible (depending on the student's income).

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

  There's no way to guarantee the best interest rates on your RESP GIC, especially if you opt for a market-linked product. But with fixed rate GICs, your best bet is to compare 3-4 providers and aim for a non-redeemable investment with a longer term.

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

  Once your money is invested into your RESP, 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 RESP.

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

  Most investors hold a combination of low and high-risk investments in their RESPs. In the beginning stages of saving, it can make more sense to hold a larger portion of high-risk equities as you begin to accumulate capital. As your child draws nearer to their studies, it can make more sense to transfer gains into a low-risk GIC to protect against market fluctuations.