Cashable GIC
Friday, April 12, 2024
Cashable GIC
Friday, April 12, 2024
Nida Shahid
Are you feeling the pinch of high inflation rates in Canada? If so, you're not alone. Canadian investors have been dealing with the challenges of rising inflation for quite some time now. However, the good news is; there's a glimmer of hope for investors seeking stable returns: cashable Guaranteed Investment Certificates (GICs).
In response to efforts by the Bank of Canada to combat inflation by maintaining high interest rates, the returns on GICs have become increasingly attractive, with some types offering rates above 5%.
Contrary to the common misconception that GICs tie up your funds, cashable GICs offer flexibility, allowing you to access your money even before the maturity date.
Let's explore what are cashable GICs and why they are emerging as a compelling choice for investors in Canada.
What is a Cashable GIC?
A cashable GIC, which stands for Guaranteed Investment Certificate, is a type of investment tool that provides a fixed return rate while allowing you to access your invested money before the maturity date without facing any penalties. Unlike regular GICs, where your money is locked in until the end of the term, a cashable GIC offers you some relief.
This investment option is tailored to meet the needs of investors who might need to withdraw their funds earlier due to unforeseen circumstances or changes in investment plans. Typically, cashable GICs come with various term options, often with a one-year maturity period. However, there are certain periods during which withdrawals may be restricted, meaning they're not entirely liquid.
Thus, a cashable GIC combines the security of a fixed return with the convenience of being able to access your money before the maturity date if needed. It's a way to strike a balance between earning a guaranteed return and having some flexibility with your investment.
Cashable GICs: How They Work
Cashable GICs operate by offering investors the opportunity to withdraw their invested funds before the maturity date without facing penalties. If you choose to withdraw, you'll receive the interest earned up until that point.
For instance, if your cashable GIC has been held for 180 days at a rate of 2.00%, you'll earn interest for those 180 days at that rate. However, if you withdraw within the first 30 days, you won't earn any interest.
In Canada, these GICs commonly have a one-year term, which can be renewed at maturity. Interest is typically paid out once at maturity, although some institutions offer semi-annual or monthly payments. Opting for more frequent payments may result in a slightly lower interest rate, but it allows for compound interest to accumulate over time.
Features and Limitations of Cashable GICs
Cashable GICs come with specific features and restrictions that you should thoroughly comprehend before investing. Here are some common aspects you might encounter:
Zero Interest Penalty: Unlike certain other types of redeemable GICs, cashable GICs pay the contract interest rate until the date you cash them in. This means you won't incur any penalties on the interest earned.
Minimum Redemption Requirements: Many issuers allow partial redemptions, provided you cash out a minimum amount. For example, you might be required to redeem at least $500 of your principal to make a partial withdrawal.
Maintaining Minimum Balances: While partial redemptions are permitted, there's often a requirement to maintain a minimum balance in the GIC to keep it active. For instance, an issuer might stipulate that your remaining balance must meet a minimum investment threshold, such as $1,000.
Only Cashable After the First 30 Days: Your funds are locked in for the initial month after purchasing the GIC. After this period, you gain cash out of the GIC as needed.
It's crucial to remember that cashable GICs suit individuals who prioritize accessibility to their funds over aiming for higher interest rates. If liquidity isn't a priority for your investment portfolio, there are various alternative GIC options available. Always ensure you fully understand the terms and conditions of any investment before making a purchase.
Should You Consider Investing in Cashable GICs?
Cashable GICs offer Canadian investors several benefits traditionally associated with GICs, along with added relaxation. Here's a breakdown of why cashable GICs could be a good investment choice:
- Principal Protection: Like traditional GICs, cashable GICs ensure that your invested capital remains safe and secure.
- Guaranteed Interest Rate: Investors receive a fixed return on their investment, providing predictability and stability in earnings.
- CDIC Coverage: Cashable GICs are eligible for Canada Deposit Insurance Corporation (CDIC) coverage, offering protection of up to $100,000 per depositor in the event of bank insolvency, subject to CDIC rules and regulations.
Additional Benefits of Cashable GICs:
- Flexibility: One significant advantage of cashable GICs is the option to withdraw funds before the GIC's term ends, providing investors with added ease in managing their finances.
- Suitability for Various Accounts: Cashable GICs can be held in both non-registered and registered investment accounts, including RESPs, RRSPs, RRIFs, RDSPs, FHSAs, and TFSAs, making them versatile for different investment needs.
- Tax Planning: Investors can utilize cashable GICs for tax planning purposes. For instance, holding a GIC in an RRSP account can offer a tax deduction, while keeping it in an FHSA can provide a deduction and tax-free growth, provided the funds are eventually used towards purchasing a first home.
- Low Minimum Investment: With a minimum investment amount as low as $500 and no investment fees, cashable GICs are accessible to smaller and newer investors, allowing them to start building their investment portfolio without substantial initial capital.
Hence we can say that cashable GICs can be a safe and reliable investment choice, particularly for individuals saving towards specific goals such as purchasing a car or a home, offering a way to grow money steadily while maintaining accessibility for future needs.
Withdrawing From Cashable GIC
When it comes to withdrawing from a cashable GIC, you have the option to choose whether to withdraw the full amount or just a portion of it. Here's how it works:
Partial Withdrawals: You're not obligated to withdraw the entire amount invested in a cashable GIC. Instead, you have the option to withdraw only a portion of your GIC while leaving the remaining amount invested. This feature allows you to access funds as needed while still earning interest on the remaining balance.
Minimum Remaining Balance: To make a partial withdrawal from a cashable GIC, you typically need to maintain a minimum remaining balance set by your bank. For most cashable GICs, this minimum balance requirement is usually around $1,000.
Minimum Withdrawal Amount: Similarly, there's usually a minimum withdrawal amount set by the bank. In most cases, this minimum withdrawal amount is also around $1,000.
For instance, let's consider you have a cashable GIC with a total balance of $6,000. If you decide to keep the GIC account open but need to access some funds, you can withdraw up to $5,000 while leaving $1,000 remaining in the GIC. The $1,000 remaining balance continues to earn interest at the locked-in GIC rate.
Alternatively, if you choose to withdraw the entire balance, you can close the GIC account. In this case, you'll receive your initial principal back along with any accrued interest earned up to that point.
This options allows you to tailor your cashable GIC to your financial needs, providing both accessibility to funds and the opportunity to continue earning interest on the remaining balance.
GIC Transfers: What You Need to Know
Unlike some other types of investments such as mutual funds, exchange-traded funds (ETFs), or stocks, GICs typically cannot be transferred between financial institutions, due to the following reasons:
Contractual Agreement: A GIC is essentially a contract between you and the financial institution where you purchased it. Each institution sets its own GIC interest rates, terms, and conditions. Therefore, transferring a GIC from one institution to another isn't feasible because it involves two separate contractual agreements.
Institutional Specifics: Since GICs are tied to the terms and conditions of the institution offering them, transferring them to another institution isn't straightforward. Each institution has its own set of offerings, and transferring a GIC would mean adhering to the new institution's terms, which may differ significantly from those of the original institution.
However, if you have a cashable GIC and need to move your investments, you have the option to cash in the GIC and reinvest the funds in a GIC at the new institution. This process allows you to maintain liquidity while transitioning your investments to a different financial institution.
Hence, while GICs offer stability and security, it's important to consider the limitations regarding their transferability. If you anticipate needing to move your investments between institutions frequently, you may want to factor this into your investment strategy and consider alternative options that offer more relief in terms of transferability.
GIC Transfers: What You Need to Know
Both cashable and redeemable GICs offer you the option to withdraw your funds before the GIC's maturity date. However, there are key differences in how interest is calculated for early withdrawals.
1. Interest Rates for Early Withdrawal
Redeemable GICs: If you withdraw funds from a redeemable GIC before the maturity date, you'll earn interest at a lower early redemption rate. This rate tends to be significantly lower than the rate you would receive if you held the GIC until maturity.
Cashable GICs: With cashable GICs, you can also withdraw funds early typically after a waiting period of 30 days, but there's no penalty or reduction in the interest rate earned. However, the base interest rate for cashable GICs is usually lower compared to redeemable GICs.
For instance, Royal Bank of Canada's redeemable GIC has redemption rates starting from 0.75% if you cash out between 30 to 59 days, increasing gradually up to 1.5% before 1 year has passed. If you hold the redeemable GIC for 1 year to 2 years less a day, the redemption rate drops to 0.05%. This shows that withdrawing early from a redeemable GIC can result in earning very minimal interest.
2. Base Interest Rates
Redeemable GICs generally offer a higher base interest rate compared to cashable GICs. For example, RBC’s 1-year redeemable GIC rate might be 3.00%, while their 1-year cashable GIC rate could be 2.25%.
In a nutshell, redeemable GICs provide the option to withdraw funds early, even though it may mean sacrificing a significant portion of the interest earned. However, if you hold the GIC until maturity, you can still earn a reasonable rate. On the other hand, cashable GICs offer the most flexible terms of withdrawals, but at the expense of a lower base interest rate.
How Can You Obtain a Cashable GIC?
Acquiring a cashable GIC is relatively straightforward, as they are commonly offered by Canadian banks.
To begin, it's essential to conduct some research to find the most competitive GIC interest rates available. Cashable GICs are available from major brick-and-mortar banks as well as online banking institutions, which may offer more favorable rates. You can purchase a cashable GIC through various channels, including online platforms, phone services, or by visiting a bank branch in person.
When selecting a financial institution for your cashable GIC, it's advisable to opt for one that is insured, such as through the Canada Deposit Insurance Corporation (CDIC). This insurance coverage provides an additional layer of protection for both you and your funds in the event of a bank collapse, offering peace of mind regarding the safety of your investment.
Final Thoughts
In wrapping up, cashable Guaranteed Investment Certificates (GICs) offer you a promising avenue to tackle the challenges posed by high inflation rates. With the Bank of Canada's efforts to curb inflation by maintaining elevated interest rates, cashable GICs boast appealing returns, often surpassing 5%.
Their unique feature empowers you to access your funds as needed, providing a reassuring sense of control in today's uncertain economic climate. Whether you aim to protect your savings or enhance your wealth, cashable GICs stand out as a practical choice for dealing with financial uncertainties.
So, consider incorporating cashable GICs into your investment strategy to enjoy the benefits of stable returns and flexibility in managing your finances.
Hi, I Am Mitch Zaba
Over the past 10+ years, we've worked closely with clients showing them how to grow their wealth, pay less taxes and how to create predictable passive income in the stock market.
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