These daily financial tips are designed to be short ideas covering different aspects of family and business finances. They are short pieces intended to provide information to enable individuals, families and businesses to make informed financial decisions. Not all tips will apply to every situation, but over the course of a year, most financial topics will be covered. Check in regularly and share with friends and associates.
Last week I talked about different types of tax advantaged/preferred accounts. Many people confuse the tax treatment of accounts with the underlying investment options. Both considerations are important for proper financial planning. This week I’ll touch on some of the features of different types of investments that can be held in either a registered (RRSP, TFSA, RESP, RIF) account or non-registered. I am only highlighting the features the different investments have. What is most appropriate for your family situation and risk tolerance is a conversation best had with an Investment Specialist or Financial Planner.
One of the securest investments is Guaranteed Investment Certificates (GIC). These investments guarantee a fixed interest rate for a specific period of time. They can range from as short as a month to as long as 5 years or more. The longer the term, usually, the higher the interest rate earned. There are many different forms of GIC and not all are created equal. It is important to understand what the withdrawal/redemption conditions are. Fewer withdrawal privileges, result in a higher interest rate. Withdrawals made from GIC prior to their maturity date (early withdrawals) will generally pay less interest than if they are held until maturity. This is the trade off for greater flexibility.
GIC are offered by banks, credit unions and many other deposit institutions. The only thing that is guaranteed, is the interest rate (subject to the GIC terms). Funds invested are only guaranteed against default to the extent of regulations for the individual institution. For example, GIC with banks fall within the Federal Deposit Insurance Corporation (FDIC) $100,000 limits. Most Credit Union deposits (which are provincially regulated) are fully guaranteed. If you are concerned about the safety of your deposits, check with the institution and their regulators to understand how much of your monies are protected.
Interest earned on GIC are considered ‘income’ for tax purposes. This means that any interested earned (has to be declared annually) on GIC are added to your Taxable Income for income tax purposes and taxed accordingly unless held in a tax advantaged account such as an RRSP, TFSA, RIF.
While GIC represent a more secure form of investment, they are not without some risk. In addition to the guarantees of the institutions discussed above, funds held in GIC investments are subject to ‘inflation risk’. This means that the purchasing power of the interest being earned on the GIC is being eroded by inflation. To calculate the effective rate of return of a GIC investment, take the interest rate (interest being earned), less/minus the inflation rate, and less any taxes that are due. In today’s low interest rate environment, the result is often negative.
GIC are secure investments, but beware of the trade offs for this security. To ensure investments are made that match your family goals and risk tolerance, it is best to consult with an Investment Specialist or Financial Planner.
Share these ideas with friends and family and come back to check out daily financial tips and ideas. If there are subjects you wish covered or questions, please email me and I’ll include them in future posts.