GICs in TFSAs
Reading up on personal finance? Looking for ways to maximize your savings and investments? Instantly compare the best accounts in Canada and boost your ROI.
Natasha Macmillan, Senior Business Unit Director - Everyday Banking
Did you know that guaranteed investment certificates (GICs) can be held in both registered and non-registered accounts? Non-registered accounts are your regular bank accounts, where you are taxed on the interest earned. Registered accounts, on the other hand, refer to tax-sheltered savings plans introduced by the government, including tax-free savings accounts (TFSAs).
What are TFSAs?
In 2009, the federal government introduced TFSAs to help Canadians both grow and withdraw their savings tax-free. At first, you could only contribute $5,000 per year. On January 1, 2013, the annual contribution limit was raised to $5,500 and has since changed to $10,000 in 2015, $5,500 from 2016 to 2018, and $6,000 from 2019 to 2022, to where it currently stands at $6,500 for 2023. Your available contribution room carries forward to future years. You can quickly find your personal TFSA contribution room with Ratehub.ca's TFSA limit calculator.
Benefits of holding GICs in TFSAs
While contributions are not tax-deductible, like with GICs in RRSPs, there are still three major benefits of holding GICs in your TFSAs:
- Your money grows tax-free. Both the interest and capital gains are tax-free.
- Your withdrawals are also tax-free. Unlike an RRSP, when you make a withdrawal from your TFSA, it is also tax-free.
- Your principal is guaranteed. Because it’s in a GIC, you know the principal will always be returned to you, so it’s a safe investment option.
- Also read: The best TFSA GIC rates
Example: GIC in TFSA vs. non-registered account
Peter has $5,000 to invest and he’s trying to decide between purchasing a regular 2-year non-redeemable GIC in a non-registered account or a 2-year non-redeemable TFSA-eligible GIC. Both GICs pay 1.15%, however, he lives in Ontario and would have to pay tax at a marginal rate of 39.41% (combined federal and provincial) on interest earned in the non-registered savings account. How much will Peter save by purchasing the GIC in his TFSA instead?
Option 1: GIC held in a non-registered savings account
Find the best GIC rates in Canada
Watch your savings grow faster, when you invest your money in the GIC products with the best interest rates
Option 2: GIC held in a TFSA
Peter would be able to save an additional $91.58 ($151.12 - $59.54) because he bought the GIC held in a TFSA, since he wouldn’t have to pay tax on any of the interest earned.
TFSAs are a great vehicle for saving money. While contributions are not tax-deductible, once money has been put into the account it is free to grow and redeem tax-free. Many GIC products are eligible and can help form part of the fixed-income component of a TFSA.
The bottom line
A TFSA GIC is a smart choice for those looking to save money while earning competitive rates and benefiting tax-free growth. By comparing rates and choosing the best option for your savings goals, you can make the most of your TFSA GIC investment.