Did you know that guaranteed investment certificates (GICs) are eligible for both non-registered and registered accounts? When many people think about registered accounts, RRSPs and TFSAs are probably the structures that come to mind first. However, RESPs are another kind of registered account, and one you might want to consider buying GICs within.
As a reminder, RESPs are registered education savings plans. As with RRSPs and TFSAs, RESPs are government-sanctioned accounts that allow Canadians to save in a tax-efficient manner. Whereas RRSPs are meant to save for retirement, and TFSAs intended to just save in general, RESPs perform a specific purpose of their own: helping people save for post-secondary education expenses. RESPs are typically set up by parents or guardians to save for a child’s eventual education expenses.
Just like investment income in other registered accounts, any money made in the RESP structure is tax-exempt. However, unlike RRSPs and TFSAs, contributions to an RESP are not tax-deductible. While there is no annual limit on how much you may contribute to an RESP, the maximum lifetime cap is set at $50,000.
Why Buy GICs in an RESP?
RESPs are allowed to hold the same kind of investments that may be purchased for other registered accounts. The two largest components are likely to be equities and fixed income products. Equities offer the potential for greater capital growth, whereas fixed income investments are aimed at preserving capital while generating some interest income in the process.
Within the fixed income component of an RESP, GICs are something to consider. Some of the advantages to buying GICs for an RESP are as follows:
- Your investment is guaranteed. GICs in an RESP are a legal obligation of the issuing financial institution. Should they fail, a backstop exists in the form of CDIC insurance.
- Especially with compound interest, the principal will grow over time.
- While in the RESP structure, the investment in a GIC is tax-free.
RESP GICs: An Example
Let’s say you’re a couple who years ago set up an RESP for your daughter. She’s now three years away from going to university, which means that expenses such as tuition are clearly on the horizon.
Not wanting to risk the capital of the RESP, you decide to take the $40,000 that’s accumulated in index funds and purchase a 3-year GIC instead. The non-redeemable GIC pays 2.15%.
How much interest will the RESP accumulate by holding this GIC?
Over the three years of the GIC, the RESP would make $2,635.86 in interest. All of which, of course, is tax-free while in the RESP structure.
How much of an RESP you invest in GICs is likely going to be a function of how close the beneficiary is to needing the money. When a child is very young, the RESP can probably withstand the volatility associated with equities. However, when post-secondary education expenses are soon to be a reality, protecting the capital of the account should probably take precedence over taking risks to grow the capital. At this risk-averse stage, GICs should definitely be on your radar.