What is a GIC and How Does it Work?

Guaranteed Investment Certificates (GICs) are a good option if you want to invest without much risk. They give you guaranteed returns at fixed rates and keep your original money safe.

If you're thinking about buying a GIC, it helps to know how they work so you can fit them into your money plans.

What is a GIC?

A Guaranteed Investment Certificate (GIC) is one of the safest ways to invest your money. It's like a deposit where you lend money to a bank for a set time. You're guaranteed to get your money back when the term ends.

When you buy a GIC, you agree to let the bank use your money for a specific period. Usually, the longer you commit, the more interest you earn.

You can start with as little as $500, and there's no upper limit.

Most GICs pay fixed interest rates for terms ranging from six months to 10 years. Some offer variable rates tied to things like stock market performance. You might get interest payments monthly, quarterly, every six months, yearly, or when your GIC matures.

If you might need your money early, look for cashable GICs that let you withdraw without penalties. Regular GICs often charge fees for early withdrawal.

Types of GICs

Cashable – You can take your money out early with these. They pay less interest but give you more flexibility.

Non-Cashable – These pay more interest but lock up your money for the whole term. No early withdrawals without penalties.

Market Growth – These GICs let you benefit when stock markets do well while keeping your original investment safe. If markets go up, you could earn more. You'll always get at least the minimum guaranteed interest.

Foreign Currency GICs – These let you earn interest in another currency, like US dollars or euros.

You can put GICs in registered accounts like RSPs, RESPs, RIFs and TFSAs to grow your money tax-free. GICs outside of registered accounts get taxed as regular interest income.

How to choose a GIC

When buying a GIC, consider:

1. Pick a term that matches your needs - from six months to 10 years.

2. Decide if you need access to your money - Regular GICs lock your money in with penalties for early withdrawal. Cashable GICs let you access your money without penalties but pay less interest.

3. Choose fixed or variable rates - Fixed rates tell you exactly what you'll earn. Market-linked GICs can pay more if markets do well, but might pay nothing if markets drop.

4. Consider if you need regular income - Some GICs pay interest monthly for steady income.

5. Think about creating a GIC ladder - Buy several GICs with different maturity dates to have money becoming available regularly.

How to cash in a GIC

When your GIC matures, you can:

• Roll it over into another GIC

• Buy a different investment

• Take the cash

If you need money before maturity:

• Cashable GICs let you withdraw early without penalties

• Regular GICs usually charge fees for early withdrawal and you might lose interest

Risks of GICs

Even though GICs are safer than most investments, they have some drawbacks:

1. They might not keep up with inflation

2. Market-linked GICs can earn less than expected if markets perform poorly

When choosing GICs, compare rates and think about your goals. Your principal is safe, which helps during volatile markets. But remember that GIC rates are often lower than inflation.

What fees will you pay on your GIC investment?

You won't pay any fees to buy or hold GICs. Banks make their money by setting the rates. But you might pay a penalty if you cash out early. Ask about these penalties before you buy.

If you might need your money before the end date, look at cashable GICs. They let you withdraw without penalties but usually pay less interest.

When you put money in a GIC, you're basically lending it to the bank for a while. The bank then lends that money to other people at higher interest rates. They make money on the difference between what they pay you and what they charge others. This difference (the spread) covers their costs and gives them some profit. So even without charging you fees, they still make money using your cash.

How is your GIC investment protected?

Your GIC is insured if you bought it from:

• Any major Canadian bank (they're members of CDIC)

• A credit union or caisse populaire

This insurance means you'll get your money back if the bank closes or can't pay you when your GIC matures. But there are limits:

• CDIC covers up to $100,000 in GICs at each bank

• Foreign currency GICs and terms longer than five years may be covered - check with CDIC

The insurance is automatic and free. To stay within the $100,000 limit per bank, you can:

1. Buy GICs at different banks or their related companies (like their mortgage or trust divisions)

2. Put some GICs in your name and some in your spouse's name

3. Own GICs jointly with your spouse

Are GICs right for you?

GICs give you a safe place to put your money with guaranteed returns. They're worth considering if you don't want to worry about losing your original investment.

They come in different types to fit different needs. If you want easy access to your cash, go with cashable GICs. If you're after higher returns and can lock your money away, non-cashable GICs might work better.

The key is matching the GIC to your situation. Think about how long you can go without the money, whether you need regular income, and how much risk you're comfortable with.

GICs won't make you rich quick, and they might not keep up with inflation. But they do offer peace of mind. Your money is protected (up to $100,000 per bank), and you know exactly what you'll get back.

For many Canadians, GICs work best as part of a bigger financial plan. You might put some money in GICs for safety while investing other money in options with higher potential returns.

Before you buy, shop around for rates. Even small differences add up over time. And remember - there's no perfect investment for everyone. GICs simply offer a reliable option in an unpredictable world.