By now, you should know that guaranteed investment certificates (GICs) can be purchased in both registered and non-registered accounts. Non-registered accounts are regular investment accounts that not come with any special tax treatment. Registered accounts, on the other hand, are government-approved structures that allow you to shelter income from taxes.
A few weeks ago, we shared why you might want to buy GICs in your registered retirement savings plan (RRSP). Another option to consider, though, is to buy GICs in your tax-free savings account (TFSA). Here’s why.
In 2009, the federal government introduced TFSAs, in an attempt to encourage Canadians to save more money. Not only is the money made while in the TFSA not subject to taxes (as is true with RRSPs), but withdrawals are also not taxable, which is not true when you invest money in RRSPs.
From 2009 to 2012, Canadians were permitted to contribute $5,000 annually to their TFSA; that limit was raised to $5,500 in January 2013 and jumped to $10,000 in April 2015. Just like RRSPs, any contribution room you don’t use in a given year carries over to future years, so it’s not a case of “use it or lose it”. For example, if you couldn’t make any contributions in 2011, that $5,000 would’ve been added to your $5,000 limit in 2012, so you could contribute up to $10,000 in 2012.
Why Buy GICs in Your TFSA?
There are three key reasons to buy GICs in your TFSA:
- You earn tax-free interest. When you buy a GIC in a non-registered account, you have to pay tax on any interest you earn. When you invest in a TFSA, however, all the interest you receive is tax-exempt.
- You can withdraw money tax-free, too. When you withdraw money from your RRSPs, it is seen as income earned and, therefore, is taxed; that’s not the case with TFSAs. Whenever you need to withdraw money from your investment, you can do so – tax-free!
- Your principal is protected. As with all GICs, your principal is guaranteed and is a legal liability of the GIC issuer. In the event that a bank of credit union failed, your money would be protected (typically only up to a certain amount) by deposit insurance.
Case Study: TFSA GIC vs. Non-Registered GIC
Let’s say you have $10,000 and are thinking of buying a 1-year GIC at 1.00% for either your TFSA or a non-registered account. Which is the better option? We’ll assume you pay tax in Ontario at the 43.41% marginal rate.
GIC Bought in a Non-Registered Account
GIC Bought in a TFSA
You earn $100 in interest in both scenarios, but by purchasing the GIC in your TFSA you save $43.41 in taxes.
TFSAs are a wonderful way to grow your savings. While you don’t receive a tax deduction for making contributions to these structures, you also will not pay any tax if you want to make withdrawals. Many types of GICs are TFSA-eligible, so keep them in mind when making your investment decisions.
Flickr: Eli Christman