GICs vs RRSPs – Should You Be Buying GICs in Your RRSP?

Understanding the landscape of personal finance in Canada involves navigating various investment and savings options, two of which are Guaranteed Investment Certificates (GICs) and Registered Retirement Savings Plans (RRSPs). 

There are a multitude of errors and incorrect assumptions Canadians make when choosing between making contributions to an RRSP or buying a GIC. In this article, I’m going to try to clear the air on a lot of them.

Let’s get started.

GICs vs RRSPs – What is the difference?

GICs are essentially fixed-term deposits offered by banks, where the principal amount is guaranteed, and a predetermined amount of interest is earned over a set period. They stand out as a low-risk investment, suitable for individuals seeking stability and predictability in their returns.

Registered Retirement Savings Plans, on the other hand, are government-regulated retirement savings accounts that allow Canadians to defer taxes on their earnings until retirement, potentially lowering their tax burden during their working years. 

Within an RRSP, individuals can hold a variety of investments, including GICs, equities, bonds, mutual funds, and more. The flexibility and tax advantages of RRSPs make them a cornerstone in retirement planning for many Canadians, underpinning their long-term savings strategy.

So, as you can see, a GIC is an investment product, while an RRSP is very much an investment account.

The choice between parking one’s savings into GICs or funnelling them into RRSPs hinges on several factors, including risk tolerance, investment horizon, and retirement goals. 

While GICs offer security, Registered Retirement Savings Plans provide tax benefits and the potential for higher returns through potentially buying equities. 

Let’s dive into the intricacies of each, and then maybe you’ll have a better idea of which option is right for you.

Comparing investment features

When considering options for saving toward retirement in Canada, it’s important to understand the distinct features of different investment vehicles. RRSPs are often thought of as an investment when, in reality, all an RRSP is an account.

The following subsections will clearly lay out the difference when it comes to Registered Retirement Savings Plans and Guaranteed Investment Certificates.

RRSPs vs. GICs

RRSPs serve as tax-advantaged accounts designed specifically for retirement savings. Inside these accounts, you can buy stocks, bonds, GICs and mutual funds, exchange-traded funds, and many other types of investment vehicles.

Contributions to RRSPs may lower an individual’s taxable income, potentially resulting in tax savings now and deferred taxes until funds are withdrawn during retirement. 

On the other hand, GICs are investment products offering guaranteed interest over a fixed term, which can be held within an RRSP or outside as a standalone investment. 

You’ll also be guaranteed your principal back on the maturity of the GIC, and the product is also insured up to $100,000 by the Canada Deposit Insurance Corporation (CDIC).

Interest rates and returns

Interest rates on GICs can be fixed-rate or variable, with fixed-rate GICs offering a consistent return and variable interest rate or market-linked GICs fluctuating based on market conditions or particular indices. 

Are GICs worth it? Returns on GICs are generally lower than potentially more volatile investments but offer a stable and guaranteed interest. 

RRSPs, conversely, can hold a variety of investments with varying interest rates and return profiles.

RRSPs open investors up to the potential for higher returns at the risk of their principal.

Although it is certainly never guaranteed, buying a broad-based index fund in your RRSP and holding it for the long term will likely yield higher returns than a GIC.

Risk and security

GICs are considered low-risk investments as they provide guaranteed interest and capital protection, making them a secure choice for conservative investors. 

With an RRSP, your risk and security is completely variable. For example, if you choose to buy a GIC inside of your RRSP, your risk is virtually the same as owning a GIC outside of the RRSP. However, if you choose to buy alternative investments like stocks, mutual funds, or ETFs, your risk is much higher.

Terms and liquidity

The term of a GIC can range typically from 90 days to 10 years, with longer terms often yielding higher interest rates. Once a GIC reaches maturity, the investor can access the principal and interest. 

Conversely, RRSP contributions can be more flexible, depending on what you have invested in. For example, if you buy a GIC inside of your RRSP, your liquidity is the same as a GIC outside your RRSP. However, if you buy stocks, the stocks could be sold and the money withdrawn at any time.

Keep in mind, however, that withdrawals are subject to tax and potentially other penalties. They are intended to remain untouched until retirement for maximum benefit.

Tax implications and advantages

Tax benefits of RRSPs

RRSPs are designed to be tax-advantaged savings vehicles for retirement. Contributions made to an RRSP are tax-deductible, which reduces an individual’s taxable income in the year the person wants to claim the deduction. 

I say it this way because it is possible to contribute to an RRSP now and defer claiming these contributions until your income is in a higher tax bracket to get more money back.

The investments within an RRSP grow tax-deferred, meaning one does not pay income taxes on the investment earnings as long as they stay within the RRSP. 

This deferral can significantly enhance the compounding effect of savings over time. Only upon withdrawal in retirement, typically at a lower income tax bracket, are taxes paid, often resulting in overall tax savings.

It is very important to understand if RRSPs are right for you. Although opening up an RRSP account seems like the right choice for everyone, tax implications in retirement can make these accounts sub-optimal. 

Tax treatment of GICs

The interest earned on GICs is taxable income. In addition to this, they’re considered interest income, which is the worst form of investment income when it comes to taxes. However, the timing and rate depend on the type of account they’re held in. 

GICs within non-registered accounts are subject to taxation in the year the interest is earned. If GICs are held in registered accounts like an RRSP or a Tax-Free Savings Account (TFSA), the interest is either tax-deferred or tax-free. So it is important to look at both registered and non-registered options for GICs.

Within an RRSP, the interest on a GIC is not taxed until withdrawal. Meanwhile, in TFSAs, GIC earnings do not attract any income taxes at all, even upon withdrawal, allowing savings to potentially grow quickly.

Selecting the right option for you

Assess your financial goals

You need to figure out the end goal when it comes to your investments. Often, if you need capital over the short-term, you could consider investing in a GIC as they guarantee the principle, you can select a term that works for your time horizon, and they offer attractive rates of interest at this point in time considering the risk.

If your financial goal is to save and invest over the long term, the RRSP is likely going to be the better route if you have figured out that the tax situation works in your favour.

Understand your time horizon

The time before retirement greatly influences one’s investment choices. 

Those with longer horizons may prefer the traditionally higher growth potential of RRSPs that hold equities, while those closer to retirement or those who may need the money over the short term for a house, car, or any other purchase might prioritize the stability of a GIC. 

Institutions like CIBC offer an array of GIC products to cater to different time horizons.

Common questions investors have when it comes to GICs and RRSPs

Now that we’ve gone over the basics of RRSPs and GICs and which option may be right for you, let’s tackle some of the most common questions that are asked when it comes to these two investment vehicles.

Can you hold a GIC in an RRSP?

Investors can indeed hold a GIC within an RRSP, which combines the fixed returns of the GIC with the tax advantages of an RRSP. This strategy can enhance the growth of retirement savings while keeping your underlying capital safe.

However, I would personally argue that it isn’t the best option for those with a longer time horizon. It has been proven that a portfolio invested in the stock market has outperformed investments like GICs. 

Considering your RRSP should be contributed to with the intention of not having to touch the money for many years, the most popular investments inside them are stocks, ETFs, and mutual funds.

If you’re closer to retirement and looking to start drawing down on an RRSP, however, it could make sense to add some fixed income to the account. Consulting a financial planner or advisor is the best thing to do.

Pros and cons of holding GICs in an RRSP

The main advantage of holding GICs in an RRSP is the benefit of tax-deferred growth. Interest earned on GICs within an RRSP is not taxed until withdrawal, which can result in more compound growth over time. 

However, the disadvantage lies in the lack of liquidity and lower returns. Because the RRSP is an account primarily utilized to invest and save over the long term, a short-term investment vehicle like a GIC may not be getting you the best returns.

What is the average return on a GIC?

The average return on a GIC varies based on the term and the interest rates offered by financial institutions. Often, online banks without brick-and-mortar locations can offer more attractive rates, but it’s never guaranteed.

You will also earn more from a non-redeemable GIC than you would a cashable GIC because of the two funds structures.

No matter the type, they generally provide modest and predictable returns due to their structure. At the time of writing this article, we’re seeing some of the best returns we’ve witnessed from GICs in a very long time. 

However, they’re subject to change depending on where the Bank of Canada moves policy rates.

Why might Some people not want to invest their money in a GIC?

Investors might avoid GICs due to their relatively low rates of return relative to an RRSP account that is invested in stocks or ETFs, especially during periods of low-interest rates, which encourages investors to seek out higher-risk investments for larger returns.

How do I ladder my GICs?

Laddering involves purchasing GICs with varying maturity dates. For instance, one could invest in one-year, two-year, three-year, four-year, and five-year GICs. As each GIC matures, the investor has the option to reinvest in a longer-term GIC, usually at a higher rate.

I have a comprehensive article on GIC laddering that you can read here.