Guaranteed Investment Certificates (GICs) are a financial tool that allows you to loan money to a bank or other financial institution for a defined time period (e.g. 1 year) at a defined interest rate (e.g. 3%). Your money will be locked-in for the duration of the term. But what happens when a GIC reaches maturity?
Typically, when purchasing a GIC, you provide instructions on what you want to do with your money at maturity. This can include redeeming the GIC and depositing the funds into the account of your choice, or automatically renewing the GIC for the same term at the interest rate offered at renewal.
You want to consider your individual circ*mstances when deciding what to do with the funds. Read on to learn more.
What Are the Options for a Maturing GIC?
Typically, you select your maturity options when you first set-up your GIC. In general however, banks will allow you to update your maturity options, even up to a few days before maturity (e.g. CIBC allows you to change up to 4 days before maturity). The GIC maturity options will vary by bank, but will likely include the following:
| Option | Description |
| Reinvest principal and interest to a GIC with the same term | This means that if you had a 1-year GIC, at maturity you will put the original capital plus and interest earned into a new, 1-year GIC. The interest rate for the new GIC will be the rate offered at the time of maturity. Rolling into a new GIC allows your money to compound, as you’re now growing your deposit and the interest. |
| Payout principal and interest to selected account | At maturity, your GIC base deposit and any interest earned will be deposited into the account selected. From there, you have the freedom to use the money as you see fit. |
| Reinvest principal to GIC with same term and pay out interest | This option is similar to the first, except that only the base capital is reinvested. So, if you invested $10,000 at 3%, at maturity the $10,000 would be rolled into a new GIC, and the $300 of interest earned would be paid out. This eliminates the ability to have compound growth but does provide some cash flow. |
Make sure you review the options and terms available when setting up your GIC.
Which GIC Maturity Option Should I Select?
When choosing maturity options, it’s important to consider your original goals. Why did you invest in the GIC in the first place?
Using a GIC for a Specific Expense
If you were saving for a specific expense (e.g. tuition, wedding, downpayment, etc.), which is our recommended usage for GICs, paying the principal and interest out would likely be the best option. As per your original goals, you protected your capital, but got some growth on it as you were planning for that upcoming expense.
Using a GIC for Compound Growth
If you’re looking for compound growth, choosing to re-invest both principal and interest may be your selection. This will allow you to grow your money, then grow it again on both your original money and the growth. Now it is important to note two things:
- If you want to maximize compound growth from a GIC, a laddering strategy is best. This involves building up to have five, 5-year GICs. If the GIC that is maturing is not a 5-year, you may want to payout as cash so you can then update the GIC you purchase to be a 5-year.
- GIC growth historically has been much lower than index funds. This difference in growth will just compound as more time passes. If you have the time to weather the volatility of the stock market, index funds are recommended over GICs.
Using a GIC for Cashflow
If you’re looking to use a GIC for cashflow, paying out the interest is a good option. This allows you to keep your original capital working for you and have some cash coming every time a GIC matures.
However, if you’re looking for cashflow, GICs likely won’t return as much as index fund or stock dividends. As well, dividends will typically occur more frequently (quarterly vs. annually), and be taxed more favourably.
So though GICs may work, there are better options to create cashflow.
What if I need my Money Before my GIC Matures?
If you expect to need the money before maturity, do not invest in a GIC.
GICs are often non-redeemable, meaning you are not able to withdraw your money before maturity. You may be able to contact the bank for an exception, but this may result in a penalty.
Even if a GIC is redeemable (meaning you can withdraw early), you will likely give up some or all of your interest by withdrawing before maturity. As well, there may be a holding period, where for example you can’t withdraw you money for the first month of the GIC.
So before considering a GIC, you should be willing to give up full access to the funds for the duration of the term. If you can’t give up access, consider using a high-interest savings account instead.
Are GICs Taxed at Maturity?
Unless held in a registered account, GIC interest earnings will be taxed at your marginal tax rate. In other words, interest earned is treated the same as employment income.
So, if your marginal tax rate is (for simplicity) 35%. If you made $1,000 in GIC interest in a given calendar year, 35% or $350 would be paid in tax. This would leave you with $650 in after-tax earnings.
GIC interest is taxed less favourably than dividends or capital gains. So, if you’re looking for long-term growth, make sure you consider the tax implications of your investments.
Now GICs can be held in a registered accounts, but generally this isn’t recommended. Tax-advantaged accounts (e.g. RRSP or TFSA) are very powerful for growth, but have contribution limits. As such you want to maximize your usage of them. This means that you should prioritize your highest growth investments.
For example, imagine you had a 1-year GIC making 3%, and an index fund averaging 10% per year. If you invested $10,000 in each, the GIC would grow by $300, and the index fund would grow by $1,000. Now would you rather save the tax on $300 of earnings, or $1,000? This is also ignoring the favourable tax treatment coming from dividends and capital gains. There is a clear winner for which should go into your registered accounts.
As demonstrated, registered accounts are best suited for your long-term, high growth investments. For GICs, consider using a non-registered account. You will pay tax on the earnings, but it allows you to save the tax on the greater returns from your investments.
Have you had a GIC that reached maturity? Let us know what option you chose and why in the comments.
