GIC vs Savings Account – What Should You Do in 2024?

ByDan Kent Published On:

When considering options for saving money, particularly ones that guarantee your capital, Canadians are often faced with a choice between buying a Guaranteed Investment Certificate (GIC) or stashing money in a high-interest savings account. 

Both financial tools offer unique advantages depending on individual financial goals and risk tolerance. However, there are some large-scale differences between the two, and which one will be worth it to you depends on your situation. 

Buying a GIC vs a savings account

A GIC is a secure investment offered by financial institutions. The principal amount is protected, and the interest rate is guaranteed for a set term unless you opt for something like a variable rate GIC. 

This makes it a stable choice for investors looking to preserve capital while earning a fixed return. However, the funds are locked up, providing next to no liquidity except in the case of a cashable GIC or if you can prove you’re in a very poor financial situation.

On the other hand, a High-Interest Savings Account (HISA) provides more flexibility than a GIC, as it allows for easier access to funds while still earning interest. 

The interest rate on a HISA may vary by the financial institution and can be influenced by external economic factors. A savings account can be the preferred choice for individuals prioritizing liquidity and the option to withdraw or deposit at any time without penalty.

GICs typically suit long-term saving strategies where access to the funds is not immediately necessary, while savings accounts fit short-term saving goals with the benefit of withdrawal flexibility. 

Each financial institution in Canada offers different terms and rates for both of these products, and it’s important for savers to carefully compare the best GIC rates and the best HISA rates frequently, as many banks will run promotional rates.

Key differences between a GIC and a savings account

A GIC isn’t an “account”

A GIC is not a traditional savings account, although many do confuse the two. While both can earn interest, a GIC typically locks in funds for a fixed term, offering higher interest rates in contrast to a savings account, which allows for greater liquidity.

You don’t make regular deposits to a GIC

Regular deposits are not typically applicable to GICs. Once you purchase a GIC, your money is invested for the entire term, and additional deposits are generally not allowed until the GIC matures.

With a savings account, you can continually add money to the account whenever you’d like.

A GIC offers next to no liquidity

Short-term financial goals may be better served by savings accounts due to their liquidity and ease of access. In contrast, GICs are often better suited for longer-term financial goals due to their higher interest rates over extended periods and the fact you cannot access the money until maturity in most cases. 

Investors should align their investment choices with the time horizon of their savings goals.

GICs can be tax-sheltered

For the most part, the interest earned in a high-interest savings account will be subject to tax as investment income. GICs, particularly registered GICs, can be held in a Tax-Free Savings Account, Registered Retirement Savings Plan, or any other tax-sheltered account here in Canada.

From a tax perspective, interest income is one of the poorest forms of investment income. So, many people look to tax-shelter their GICs.

An explanation of GICs

Guaranteed Investment Certificates (GICs) are a popular choice in Canada for those who seek secure and stable returns. 

This section will explore the basics of what GICs entail, their safety, types, and their advantages and potential drawbacks.

For most topics here, we have an in-depth article that explains them further. We’ll link to it in the section.

What is a GIC?

A GIC is a type of Canadian investment where an individual lends money to a financial institution for a set term. In return, they receive a guaranteed rate of interest that is either paid semi-annually, annually, or even compounded and paid out at maturity. Your principal (the money you give the bank) is guaranteed.

The term on a GIC can range anywhere from 30 days to 10 years.

Is your money safe with a GIC?

Funds invested in GICs are generally safe and secure investment options. Most GICs are eligible for Canada Deposit Insurance Corporation (CDIC) coverage, which protects the investment of up to $100,000 if the issuing institution fails.

One of the most important things you can do before purchasing a GIC is checking if the institution is a member of the CDIC. I would not be buying a GIC from an institution that isn’t.

Along with this, if you do plan to invest more than $100,000, it could be wise to split it up among other institutions. If you have $150,000 to invest and put $100,000 of it at a CDIC member institution and the additional $50,000 at a separate CDIC member institution, you now have coverage on all of your money instead of just $100,000. 

Types of GICs

  • Cashable GICs: These GICs allow you to redeem your investment before the term ends without penalty. I go over cashable GICs in depth in this article.
  • Non-redeemable GICs: These GICs offer the higher interest rates but require you to lock in your funds for the full term. Have a read of my non-redeemable GIC guide here.
  • Variable Rate GICs: These GICs do not offer a fixed rate of return. Instead, they offer a variable rate of return that fluctuates based on the Bank of Canada’s decisions with policy rates.
  • Market-Linked GICs: These GICs offer protection of principal but not a guaranteed rate of return. They’ll be linked to a particular asset or market index, and you’ll participate in a portion of that asset’s returns. If the asset loses money over the course of your term, you’ll get your principal back with no return. I go over market-linked GICs in depth here.

A basic look at the pros and cons of a GIC

The pros of a GIC

  • GICs offer a fixed interest rate, providing a predictable return
  • Most GICs are backed by governmental insurance up to specified limits, making them a low-risk investment
  • Utilizing a GIC laddering strategy can increase your rate of interest plus increase your liquidity
  • You have the ability to pick your own term, one that can line up with your financial goals

The downsides of a GIC

  • GICs limit access to your funds until the end of the term or unless you hold a cashable GIC or can prove significant financial hardship
  • While GIC interest rates are generally higher than regular savings accounts, they may be lower than other investment types, potentially leading to lesser returns in high-inflation environments
  • Because of the above, they tend to be subpar investments for long-term capital. Opportunity cost of alternate investments like stocks, ETFs, or mutual funds, which have historically outperformed GICs, exist

High-interest savings accounts explained

 Canadian financial institutions, such as banks and credit unions, provide various savings account options to cater to investors and savers.

Am I a huge fan of these accounts? Not necessarily, especially with the diverse amount of products available today like short-term GICs, HISA ETFs, and even some companies like Wealthsimple and Equitable Bank paying outstanding rates on regular cash accounts.

However, I’ll explain them nonetheless.

What is a savings account?

A savings account is a financial product offered by banks and credit unions that allows individuals to deposit funds, keeping their money secure while earning interest over time. 

The interest rate provided depends on the financial institution and can vary over time, especially when banks offer promotional rates.

You’ll often see the rate of interest provided on a HISA account relative to the Bank of Canada’s policy rates. However, many major banking institutions have often been criticized for not increasing their rates of interest despite policy rates increasing. 

The different types of savings accounts

  • Regular Savings Accounts: Typically have lower interest rates but also lower requirements or fees.
  • High-Interest Savings Accounts: As mentioned, these accounts offer higher interest rates.
  • Tax-Free Savings Accounts (TFSAs): Allow Canadians to earn interest tax-free but have contribution limits
  • Youth or Student Savings Accounts: Designed for younger savers, often with additional perks or educational tools
  • First Home Savings Account: A newer account introduced by the government for those looking to save for a home. You can earn tax-free money inside this account, but there are contribution limits and a maximum contribution.

Different things to consider with high-interest savings accounts

  • Interest Rates: Evaluate how competitive the rates are and negotiate rates with institutions to ensure you’re earning the highest amount possible
  • Fees: Look for accounts with lower or no monthly fees. If your bank is charging you a fee to hold a savings account, look elsewhere.
  • Access to Funds: Consider how easily you can withdraw your money.
  • Minimum Balance Requirements: Some accounts require a minimum balance to maintain the account or to earn higher interest rates.
  • Deposit Insurance: Ensure the financial institution is a member of the Canada Deposit Insurance Corporation (CDIC), which protects eligible deposits up to $100,000 per insured category.

Common questions investors have when deciding between a GIC and a HISA

Can you buy a GIC inside of a savings account?

A GIC, or Guaranteed Investment Certificate, is not a type of savings account but a separate investment vehicle. While both can be part of a broader savings strategy, a person cannot “buy” a GIC within a savings account. 

Instead, one can use funds from a savings account to purchase a GIC from a financial institution.

Why would you choose to put your money in a GIC versus a savings account?

One would choose a GIC over a savings account when they want higher returns and have no need for the capital over the amount of term they choose. Alternatively, one may choose a lower rate of interest for the option of liquidity within a high-interest savings account.

You will typically see investors doing this when they have short-term investment goals, like buying a car, a home, or renovations.

Risk and return considerations between the two investments

The relationship between risk and return is a key factor in any investment decision. Savings accounts offer very low risk and provide quick access to funds, which can be ideal for an emergency fund or short-term savings goals. 

Meanwhile, GICs, while still low risk, may offer higher returns at the cost of accessibility, making them more apt for long-term investments where capital preservation is crucial.

So, GIC or savings account, which one is right for you?

Assess your financial situation

Before choosing between a GIC and a savings account, one must take a close look at their current financial situation. This involves evaluating the following:

  • Liquidity needs
  • Financial stability
  • Anticipated short-term and long-term expenses
  • Your long-term financial goals

Once you have this figured out, you can move on to the next step.

When to consider GICs over a savings account

If an individual’s plan allows for setting aside funds for a fixed period without the need for immediate access, GICs are often a suitable choice. 

They typically offer higher interest rates compared to a traditional savings account, which can be advantageous for long-term savings strategies.