Investing in Guaranteed Investment Certificates (GICs) is a popular strategy in Canada for those seeking a low-risk way to grow their savings. Two common types of GICs are cashable and redeemable GICs. While both offer some flexibility compared to locked-in GICs, they have distinct characteristics that make them suitable for different investment goals. This article dives into the workings of these GICs, key differences, and factors to consider when choosing the best option for your financial needs.
What Are Cashable and Redeemable GICs?
Cashable and redeemable GICs are financial products that allow you to withdraw your principal investment before the end of the term without penalty or with minimal loss. These options offer more flexibility compared to traditional GICs, which require you to keep your funds locked for a specific period.
- Cashable GICs: These allow you to access your funds after a short initial period (often 30 or 90 days), making them ideal for those who need liquidity with a bit of interest accumulation.
- Redeemable GICs: These allow for early withdrawal, but may impose interest penalties or offer lower interest rates compared to traditional GICs.
How Cashable GICs Work
A cashable GIC is a type of investment that allows you to cash out your money after a specified “lock-in period.” This lock-in period typically ranges from 30 to 90 days. Once this period ends, you can access your funds without penalty, though the interest rate may be lower than locked-in GICs.
Here’s how they work:
- Initial Investment: You invest a lump sum in the GIC, and the funds are held by the bank or financial institution.
- Lock-In Period: During the first 30–90 days, your investment is locked, meaning you cannot access the funds.
- Liquidity Post-Lock-In: After the lock-in period, you can withdraw your money at any time without incurring a penalty.
- Interest Accumulation: Interest rates are typically lower for cashable GICs, reflecting the flexibility they offer. You earn interest for the time the funds remain in the GIC.
| Feature | Cashable GIC |
|---|---|
| Lock-In Period | 30–90 days |
| Early Withdrawal | Allowed after lock-in period |
| Interest Rate | Lower than traditional GICs |
| Ideal For | Short-term savings, emergency funds, liquidity needs |
How Redeemable GICs Work
A redeemable GIC offers flexibility similar to a cashable GIC but with more conditions. With a redeemable GIC, you can access your funds at any time, but there may be penalties or a lower interest rate for early redemption.
Here’s how redeemable GICs work:
- Initial Investment: You deposit a lump sum with a financial institution.
- No Lock-In Period: Unlike cashable GICs, redeemable GICs often do not have a defined lock-in period. However, interest penalties may apply if you withdraw early.
- Interest Accumulation: These GICs typically offer higher interest rates than cashable GICs but lower than traditional GICs. If you redeem the GIC early, the interest may be calculated at a lower rate.
- Early Withdrawal Penalty: Depending on the institution, you may forfeit a portion of the interest earned if you redeem early.
| Feature | Redeemable GIC |
|---|---|
| Lock-In Period | None, but penalties may apply for early withdrawal |
| Early Withdrawal | Allowed, with potential penalties |
| Interest Rate | Higher than cashable GICs, but lower than locked-in GICs |
| Ideal For | Investors wanting flexibility with slightly better returns |
Cashable Vs. Redeemable GICs
| Feature | Cashable GIC | Redeemable GIC |
|---|---|---|
| Withdrawal Flexibility | Available after a lock-in period (30–90 days) | Available anytime, but with potential penalties |
| Interest Rate | Lower | Higher than cashable, lower than traditional GICs |
| Penalties for Early Access | None after the lock-in period | May face interest penalties for early withdrawal |
| Ideal Investment Horizon | Short-term, for investors needing liquidity | Short-to-medium term, for those balancing returns and flexibility |
Key Features to Consider
When selecting between cashable and redeemable GICs, consider the following factors:
- Interest Rate: Cashable GICs tend to have lower interest rates compared to redeemable GICs. If you’re looking to grow your savings faster, a redeemable GIC might be more suitable.
- Liquidity: Cashable GICs offer access to funds after a short lock-in period. Redeemable GICs provide more immediate liquidity but with potential penalties.
- Investment Horizon: If you need access to your funds in the short term, a cashable GIC is a good option. If you can leave your money invested for a longer period but want the flexibility to access it if necessary, a redeemable GIC might work better.
- Penalties: Redeemable GICs may come with penalties for early withdrawal, while cashable GICs do not have penalties after the lock-in period.
Pros and Cons
| GIC Type | Pros | Cons |
|---|---|---|
| Cashable GICs | – Offers liquidity after short lock-in periods – Suitable for emergency funds | – Lower interest rates – Limited growth potential |
| Redeemable GICs | – Higher interest rates than cashable GICs – Flexible with early withdrawal options | – Potential penalties for early withdrawal – Lower rates than traditional GICs |
Frequently Asked Questions (FAQs)
1. Can I withdraw my funds from a cashable GIC at any time?
- You can withdraw funds from a cashable GIC after the lock-in period (usually 30–90 days) without penalties.
2. What happens if I withdraw early from a redeemable GIC?
- If you withdraw early from a redeemable GIC, you may face an interest penalty, which could mean you earn a lower rate of return than initially offered.
3. Which GIC type is better for short-term savings?
- Cashable GICs are generally better for short-term savings because they offer quick access to funds after a brief lock-in period.
4. Are the interest rates on cashable and redeemable GICs lower than traditional GICs?
- Yes, both cashable and redeemable GICs usually offer lower interest rates compared to locked-in GICs, reflecting the flexibility they provide.
5. How are GICs insured in Canada?
- Most GICs in Canada are insured by the Canada Deposit Insurance Corporation (CDIC) up to $100,000 per institution, providing additional security for your investment. Read more here
