Advertiser Disclosure

How To Hold A GIC In An RRSP

Zack Fenech
Contributor

Updated: Mar 1, 2024, 3:26am

Aaron Broverman
editor

Edited By

Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.
How To Hold A GIC In An RRSP

Table of Contents

{{ tocState.toggleTocShowMore ? 'Show more' : 'Show less' }}

Neither Registered Retirement Savings Plans (RRSPs) nor Guaranteed Investment Certificates (GICs) have a reputation for being particularly exciting methods of investing.

However, when combined, RRSP GICs are a popular option among Canadians who value the low-risk, tax-advantaged route to building wealth.

Learn more about how you can hold a GIC in an RRSP below, with more information about whether this investment might be the right fit for your retirement planning strategy.

What Is an RRSP?

An RRSP is a retirement savings plan registered with the Canada Revenue Agency (CRA). It allows Canadians to save and invest for their retirement with various tax advantages until the last day of the year they turn 71. Interest earned in an RRSP is tax-deferred until withdrawal.

While its name implies that an RRSP can only hold savings, the account can hold a variety of investments, including stocks, mutual funds, bonds, Exchange Traded Funds (ETFs) and GICs.

What Is a GIC?

Alternatively, a GIC is a secured investment, available in a non-registered or registered format. Its name implies what it provides: guaranteed interest, meaning the interest rate is guaranteed, no matter what. Funds in a GIC are locked for a preestablished period known as a term. GIC terms typically can range from  one month to 10  years in length, though the most common spans between one and five years.

A GIC reaches maturity when the term is complete and the amount invested, plus interest earned, is returned to the investor. Funds withdrawn before the investment reaches maturity may be subject to monetary penalties, depending on the financial institution issuing the certificate and whether the certificate is cashable or redeemable.

Related: Best GIC Rates In Canada

How To Put a GIC in an RRSP

To put a GIC in an RRSP, you’ll need to purchase an RRSP GIC from a bank, credit union or brokerage. Most registered GICs will require a minimum investment of $500, though this varies depending on the institution.

You’ll also need to ensure enough contribution room in your RRSP before purchasing an RRSP GIC, as overcontributing can lead to financial penalties from the CRA.

Interest earned from a GIC does not affect your contribution room—only the money deposited goes towards your RRSP contribution limit.

When purchasing an RRSP GIC, you’ll want to ensure that the institution issuing the term deposit is insured, protecting your investment from fraud or institution foreclosure.

GICs issued by banks are insured by the Canadian Deposit Insurance Corporation (CDIC), while GICs from credit unions are insured by provincial credit union insurance, the latter differing from province to province.

GICs purchased from CDIC-insured institutions are covered up to $100,000 per GIC, while GICs purchased from credit unions vary depending on the province in which the credit union operates.

Why Put a GIC in an RRSP?

Placing a GIC in an RRSP allows investors to grow their benefits tax-free until withdrawal. Interest earned in a non-registered GIC will be taxed as income, but with a registered GIC, interest earned grows tax-free.

Learn more: Are GICs Taxable?

The Pros and Cons of an RRSP GIC

Pros:

  • Stability. RRSP GICs are among the safest and most stable investments available to Canadian investors and are immune to prime rate changes and economic disruptions.
  • Guaranteed. RRSP GICs are guaranteed, meaning you won’t lose any money and can foresee how your investment will perform once it reaches maturity.
  • Tax-Advantages. RRSP GICs are registered and offer significant tax deductions and tax-deferral advantages. Since they’re generally designed for long-term investing, an RRSP GIC will have little impact on your retirement plans, that is, if the investment matures before you plan to retire.

Cons:

  • Performance. While interest is guaranteed, RRSP GICs don’t typically outperform other investment options and tend to provide much lower returns.
  • Liquidity. RRSP GICs are not liquid. Funds are locked in the investment, which will not permit you to withdraw without penalty, which may affect your retirement or participation in programs such as the Home Buyers Plan or the Lifelong Learning Plan.
  • Penalties. RRSPs and GICs both come with their own set of costs or penalties for early withdrawals.

Alternatives to an RRSP GIC

One suitable alternative to an RRSP GIC is a Tax-Free Savings Account (TFSA) GIC.

A TFSA also permits a GIC to grow tax-free once the investment has matured. TFSAs, like RRSPs, are also subject to yearly contribution limits. However, TFSA GICs allow for tax-free withdrawals and deposits, within the account owner’s individual TFSA contribution limit.

Bottom Line

RRSP GICs are among the most reliable investments a Canadian can purchase. While they don’t perform as well as other investments, they’re recession-proof, which can give you peace of mind if your risk-tolerance is low.

If you value the slow-and-steady route when it comes to investing and find comfort in lower, predictable returns, an RRSP GIC might be a suitable option for you.

Frequently Asked Questions (FAQs)

What is an RRSP GIC?

An RRSP GIC is a GIC held in an RRSP. An RRSP GIC grows with guaranteed interest at a rate that usually outperforms traditional RRSP rates.

Is it better to put an RRSP in a GIC or a TFSA?

Both RRSP GICs and TFSA GICs both offer great tax-advantaged investing options. However, which one is better depends on your personal investing needs.

If you plan on withdrawing money before retirement, a TFSA GIC might be the more suitable option. However, if you’d like to withdraw from your RRSP after you’ve retired, an RRSP GIC might be the more attractive choice.

Are RRSP GICs good for retirement?

Whether or not an RRSP GIC is good for retirement depends on your financial situation and goals. If you need access to funds immediately when you retire, an RRSP GIC may not be a suitable investing option, as funds tend to be locked in GICs. However, if you place a portion of your funds in a GIC and have access to more money, an RRSP GIC can continue to earn money on your behalf.

What happens to an RRSP GIC when you turn 71?

An RRSP GIC is deposited into a Registered Retirement Income Fund (RRIF) if the investment matures after the last day of the year you turn 71. You can hold the investment after retirement, but the GIC must remain in a registered account.

Sources

Best Ofs
Recommended Reading

More from   Advisor

Information provided on Forbes Advisor is for educational purposes only. Your financial situation is unique and the products and services we review may not be right for your circumstances. We do not offer financial advice, advisory or brokerage services, nor do we recommend or advise individuals or to buy or sell particular stocks or securities. Performance information may have changed since the time of publication. Past performance is not indicative of future results.

Forbes Advisor adheres to strict editorial integrity standards. To the best of our knowledge, all content is accurate as of the date posted, though offers contained herein may no longer be available. The opinions expressed are the author’s alone and have not been provided, approved, or otherwise endorsed by our partners.
Zack Fenech Contributor

Zack Fenech is a professional finance writer from Toronto. He is passionate about demystifying complex finance topics and making them digestible and easy to follow for the average Canadian. Zack has previous experience writing for various Canadian fintech companies and financial publications, including Ratehub.ca, MoneySense.ca, and WealthRocket, the latter of which he served as editor-in-chief.