Registered Or Non-Registered GICs: Which One Should You Consider?

A registered GIC is held in a registered investment account, such as a TFSA, RRSP, FHSA or RESP. These accounts act as a tax shelter to promote compound interest, meaning you won’t need to pay taxes while holding the investment in the account. From there, you have the option to reinvest profits and grow your investment at a faster rate. However, withdrawals can become a taxable event depending on the type of account.

Registered accounts have varying restrictions that are essential to understand before investing in a registered GIC. For instance, RRSP and FHSA withdrawals trigger taxes. RESPs are designed to save for higher education and have penalties for ineligible redemptions. Meanwhile, TFSAs don’t impose withdrawal restrictions but they do have annual contribution limits.

While registered GICs benefit from tax-free growth, ensure the account restrictions align with your investment objectives.

Pros:

• Deferred or tax-free growth, leading to enhanced compound interest.
• Ideal for specific goals like retirement or education savings.
• Low-risk, predictable return.

Cons:

• Potential penalties for early withdrawals.
• Penalties for exceeding contribution limits.
• You still pay taxes upon withdrawal with tax-deferred accounts.

A non-registered GIC is not held in a tax-advantaged investment account. This offers more flexibility, but earnings are taxed as income in the year they are earned. The interest earned is taxed at your marginal tax rate. For example, assume you fall into a 35% marginal income tax bracket. In that case, you’ll only walk away with 65% of the interest earned that year, turning a 5% interest rate into 3.25% after taxes.

As you can see, non-registered GICs cut short compound interest as you can’t reinvest the entire sum into another GIC. You can only reinvest the after-tax income since they aren’t tax-advantaged. This is the cost of their flexibility.

Pros:

• A greater flexibility and easier access to funds.
• No annual contribution limits.
• A low-risk, predictable return.

Cons:

• A decreased effect of compound interest.
• A less favourable tax treatment than dividends and capital gains.
• All earnings are subject to tax and must be declared as investment income.

Investing in a GIC is best when you want a low-risk, predictable return. It’s especially appealing lately, given rising interest rates and economic uncertainty. You can use GICs as an inflation hedge, and they are CDIC-secured, implying no deposit risk on up to $100,000 per account.

Otherwise, investing in GICs is wise if you expect to need the money soon. When investing in GICs, you select a duration, known as the term length. You can align the term length with a life milestone to provide a predictable amount at maturity. For instance, you may expect to retire soon and access funds or finance your home’s down payment. You can also pursue a GIC laddering strategy if you prefer more flexibility.

Overall, the low-risk nature of GICs provides refuge from the stock market volatility. This means your investment won’t experience a sharp drop in value, which is especially useful if you don’t have time to wait for a market rebound. However, stock market returns tend to exceed GICs in the long term. This is why investors commonly use GICs as short-term, low-risk investments while they await market clarity.

A registered GIC enhances your rate of return if you can avoid penalties. While the tax-shelter benefits of registered accounts are certainly appealing, they have more restrictions. Analyzing registered account restrictions is essential to ensure they align with your GIC investment goals.

In contrast, non-registered GICs are better if you want to maximize flexibility. They are commonly used by big-ticket investors who exceed contribution limits set by registered accounts. However, non-registered GICs are best kept as short-term investments because the need to pay annual taxes impacts their ability to compound.

Overall, GICs offer a predictable, low-risk return. While providing a safe haven for investors, the type of GIC impacts how you are taxed. Registered GICs are more tax-efficient, while non-registered GICs provide greater flexibility and easier access to funds. If opting for a registered GIC, ensure the account restrictions align with your financial objectives. Otherwise, the penalties could counteract the tax benefits.

Related: How To Hold A GIC In An RRSP