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TFSA GIC guide

Guarantee your principal and start earning tax-free interest on your investments with a TFSA GIC.

If you want to start earning higher interest rates on a Tax-Free Savings Account, then a TFSA GIC (or Guaranteed Investment Certificate) could be the right fit for you. These investments offer a guaranteed return on principal and are a low-risk addition to any diversified portfolio.

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

How does a TFSA GIC work?

Tax-Free Savings Accounts (TFSAs) are government-registered plans that let you earn tax-free interest on your savings. TFSA GICs are investment products that can be held in TFSAs to help you earn a higher interest rate. These investments are a low-risk option because they allow you to earn interest tax-free while still guaranteeing your principal.

TFSA GICs are usually invested for a specific term and you can choose either a fixed or a variable interest rate. Fixed rates offer a guaranteed return on interest over time, while variable rates (associated with market-linked GICs) offer a fluctuating return based on the performance of the stock market.

Why invest in a TFSA GIC?

TFSA GICs are a safe and secure investment option because they are guaranteed to protect your principal. For this reason, they can be a good fit if you want to balance risk in your portfolio, given that they protect your cash from fluctuations in the stock market.

Another benefit of TFSA GICs is that they can help you earn higher interest rates than you might with a regular TFSA. For example, an average TFSA might promise a return of 0.5% while a TFSA GIC could offer as much as 3% back. Since your earnings won’t be taxed, you’ll also get a higher return than you would by investing in a regular GIC.

The downside of a TFSA GIC is that you might earn a lower return on interest than you would by investing in higher-risk equities. If you want to take more risk with your investment, you could look at putting your money into a market-linked GIC, which offers a variable interest rate based on how well a particular index you invest in performs on the stock market.

How to compare TFSA GICs

There are a number of features you can compare for TFSA GICs to find the best deal.

  • Fixed or variable rate. You can earn up to 3% interest on your investment with a fixed rate GIC. Interest rates for market-linked GICs will fluctuate based on how well the stock market is doing.
  • Length of term. You can take out a TFSA GIC for between 3 months-10 years, with longer terms typically offering the best interest rates.
  • Minimum investment. Many issuers will require you to put in a minimum amount of money to get your GIC up and running (often $500 or more).
  • Redemption type. Cashable GICs can be taken out at any time while non-redeemable GICs will require you to pay a penalty for early withdrawal.
  • Payment frequency. You can choose to be paid interest 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 TFSA GICs

Before you invest in a TFSA GIC, there are a couple of things you should be aware of.

  • Lower return. If you choose a fixed rate term, you could end up making less than you would by investing in higher risk equities or a market-linked product.
  • Limited access to funds. You could have issues getting your money out of your TFSA if it’s invested in a non-redeemable GIC.
  • Unable to cope with inflation. GICs that are invested over longer terms may offer interest rates below the industry standard. For this reason it can be better to ladder your investments so that they roll over each year and can be reinvested at more competitive rates.

Bottom line

TFSA GICs are a suitable option if you’re looking for a tax-free investment guaranteed to protect 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 TFSA GICS

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