Investing in guaranteed investment certificates (GICs) is a great way to grow your money without a lot of risk. For Canadians, there are a lot of benefits to investing in GICs: your principal is guaranteed, your interest is (almost always) guaranteed, GIC rates are much better than most savings accounts, and the fact that it’s locked away for a period of time means it protects you from yourself.
For our neighbours in the United States, certificates of deposit (CDs) are a similar product to GICs that allow you to safely invest your money. Here are a few of the similarities and differences between the two:
GICs can be purchased for almost any length of time, from 30 days to 10 years (1-5 years being the most popular). If you’re not sure about committing for a lengthy term, you can hold multiple GICs with different dates of maturity to have regular access to at least some of your money (otherwise known as GIC laddering). Just remember that with most GICs, the longer you’re willing to invest your money for, the higher the GIC rate you’ll receive.
CDs can be purchased in similar ranges, with short-term products available, and 1-5 year terms being most common.
Great news if you’re saving for a big purchase, your retirement or your child’s education. GICs can grow in tax-deferred or tax-free registered accounts, including RRSP GICs, RESPs GICs, and TFSA GICs.
CDs can also be purchased in tax-preferred accounts. CDs are eligible investments for both traditional and Roth individual retirement accounts (IRAs), as well as Coverdell education savings accounts.
When you invest in a GIC with a term of 5 years or less, your deposit is automatically insured by either Canada Deposit Insurance Corporation (CDIC) or a provincial deposit insurer, in the event that your financial institution failed. The amount that’s protected depends on which insurer covers you. For example, CDIC protects up to $100,000, while there is no maximum to the amount protected by Credit Union Deposit Insurance Corporation (CUDIC) in British Columbia. You can read more about GIC insurance here.
CDs are insured by the US Federal Deposit Insurance Corporation (FDIC). Deposits in CDs are covered up to $250,000 in the event that a financial institution goes under.
What happens if there’s an emergency and you need access to your money early? Depending on the GIC product you invest in, you may or may not be able to cash out early. If you invest in a cashable GIC, you can cash out after a “closed period” (typically 30 days) and still earn interest for each day your money was invested (but not the interest you would’ve missed out on). If you invest in a redeemable GIC, you can usually cash out after a closed period but may only earn a reduced rate of interest for each day your money was invested. If you invest in a non-redeemable GIC, you’ve signed a legal contract that commits your money for a specified period of time. Even if you’re able to prove financial hardship, you may not be able to cash out of a non-redeemable GIC early. If you can, you’ll typically lose the interest you might’ve accrued, and there may even be a penalty fee involved.
The consequences of making an early withdrawal from a CD will typically cost around a few months interest. Most financial institutions will simply state that you have to pay “90 days of interest” in your contract, or more as made relative to the length of time you invested your money for.
Guaranteed Investments in Other Countries
If you’re wondering, GICs and CDs aren’t just limited to Canada and the United States. Similar products exist in countries around the world – only our names are unique, as almost everyone else just calls them term deposits. Here are a few examples of what’s available outside of North America:
Term deposit accounts in the UK compare closely to GICs and CDs. Brits can also deposit their savings in notice accounts, which have no fixed-term but require you to give notice before making a withdrawal – anywhere from 7 to 120 days, or even up to 6 months.
Term deposits with fluctuating interest rates are available, and accounts are offered that give preferential interest rates to investors over 55 years of age.
Personal term deposits in Australia offer interest rates as high as 3.00% on just 1-year terms, and the principal is guaranteed up to $250,000, in the event that the financial institution failed.
Term deposits are similar to GICs, with your principal being guaranteed and deposits insured up to 10 Million Yen (a little over $100,000 CAD). We also found a 2-week maturity account, known as a circle deposit, with an option to withdraw only at the end of each 2-week term. (Weird!)
Time deposits are offered in Argentina, and we even found one account that allows you to earn points based on how much money you invest, similar to credit card rewards. If you’re willing to invest with Argentine Pesos, you can get interest rates up to 25%!
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