Savings plan - GIC vs. TFSA
Jamie McHattie: I want to start saving money…not an RRSP but something like a tax free savings account or GIC but I don’t know exactly what they are or which is the best way to go. Help please?!
Answer: Good for you – having a saving plan is the base of every successful financial security plan. Once you have a savings plan for emergencies or opportunities, other parts of your plan such as home ownership or investments are more secure. There are a few different products to use for a savings plan.
GIC stands for Guaranteed Investment Certificate. This is a plan that locks in your money for a length of time and guarantees you interest. Generally, the longer the term of the investment – the higher the interest rate. A non-redeemable GIC means that you cannot withdraw the savings until the term is up. A redeemable GIC means that you may be able to withdraw the money, but there will be an interest adjustment based on how long the money was actually invested for. A GIC can be held in a RRSP, in a TFSA or just as a non-registered plan. Interest earned on a GIC that not in a RRSP or a TFSA will be taxed.
TFSA stands for Tax-Free Savings Account. It is a registered plan (by registered, it means that Canada Revenue Agency (CRA) tracks it), that allows you to invest up to $5,500 per year and the earnings on the investment are not taxed. There is no tax refund though. There is a carry forward so if you have never invested in a TFSA – you can contribute up to $5,500 annually. This is an increase from the annual contribution limit of $5,000 for 2009 through 2012. You can invest for short term or long term in your TFSA. A TFSA is most tax effective for high risk investments such as stocks or high risk mutual funds as that is where you have the most potential for investment growth that you wouldn’t pay tax on. However, for short-term investments, the TFSA is still a good place to save. You can invest in a high yield interest account that allows full access, no risk on your investment but a low rate of return.
The most important part of a financial security plan is to start now on a regular basis – pay your-self first!