GIC’s Held Inside TFSA’s
When choosing the types of investments they want to include in their TFSA, many people include GICs as part of their portfolio. Guaranteed Investment Certificates are popular because they offer a guaranteed rate of return over a certain time period and you’re guaranteed not to lose your principal (so long as it’s with an insured institution). But because they are quite low-risk compared to other types of investments (bonds, stocks, etc) the rate of return is not that high.
When choosing a GIC to include in your TFSA portfolio, you need to decide which type you want:
| Type of GIC | Annual rate of return | Length of term | Usual minimum investment | Penalty for early withdrawal? |
| Cashable with a major bank | up to 0.8% | 1 year | $1000 | no |
| Cashable with self-directed investing | ~1.4% | 1 year | $10 | no |
| Redeemable with a major bank | up to 1.8% | 1-5 years | $500 | yes |
| Redeemable with self-directed investing* | n/a | n/a | n/a | n/a |
| Non-redeemable with a major bank | up to 2.3% | 1-10 years | $500 | n/a |
| Non-redeemable with self-directing investing | up to 2.6% | 1-5 years | $10 | n/a |
*Most online brokerage firms no longer offer redeemable GICs. Figures above are approximate, and are as of 2017.
Redeemable GICs
These types of GICs can be redeemed at any time but you’ll lose out on the full interest rates; the banks will give you a minimal rate (typically 0.05%) if you withdraw early. Choose these if you want the flexibility to handle an anticipated upcoming cost such as a house repair or wedding.
Cashable GICs
These are similar to redeemable GICs except you can cash them anytime and get the full interest right up to that date. Choose these if you want immediate access to money for emergency reasons.
Non-redeemable GICs
These types of GICs are designed for those who plan to leave the money alone for a certain period of time. Note these funds are inaccessible prior to their maturity date. So even though theoretically you are allowed to access TFSA funds anytime you want, tax-free, this only applies when there are no bank-issued restrictions on the funds. Choose these if you don’t anticipate using the money anytime soon.
Self-directed investing in GICs
If you prefer to manage your TFSA yourself, the various online brokerage firms can offer comparable rates to the traditional banks. In some cases the banks will have better interest rates; other times it will be the online firm (eg. BMO Investor Line) that can get you a better rate. It all depends on what type of GIC you want and how long you plan to keep it in your TFSA.
Note that if you want a longer-term GIC in your portfolio, the online firms will only offer ones up to 5 years. And Questrade doesn’t even offer GICs.
What to watch out for
If you invest with a smaller bank or credit union you may get much nicer interest rates as they are trying to grow their business. But there is usually a catch…if you redeem early you may be hit with high-interest penalties, so read the fine print!
Regardless of who you invest with, if you want to move your money from one financial institution to another, there will almost certainly be a transfer fee. These can add up if you move money around a lot so do your math.
Are your GICs insured?
If you invest your money with one of the larger banks in Canada, your money is likely insured by the Canada Deposit Insurance Corporation (CDIC). But be aware that CDIC insurance is only available for investments of less than $100,000 and with maturities of less than 5 years. If you invest in a 10-year GIC, there is the chance you may not be insured for the final 5 years! Check with the bank to see if they are CDIC-insured, and whether they have additional insurance for longer-term investments.
If you invest your money with a smaller bank or credit union you run the risk they aren’t insured by the CDIC (or their provincial equivalent). So, if they ever went bankrupt, you’d lose your money. There’s always a trade-off!
Sources:
https://www.cibc.com/ca/rates/tfsa-rates.html
http://www.cdic.ca
http://www.icicibank.ca/personal/Investments/tfsa.html
http://www.bmoinvestorline.com/ILClientWeb/marketing/marketingGICRates.do?method=displayGICRates&language=E