As Canadians approach retirement, financial planning becomes crucial. One investment option that often comes up is the Guaranteed Investment Certificate (GIC). This article aims to provide a comprehensive understanding of GICs, especially for those approaching retirement.
What is GIC?
A Guaranteed Investment Certificate (GIC) is a low-risk investment offered by banks and financial institutions in Canada. When you buy a GIC, you agree to lend money to a bank for a set period of time. In return, the bank pays you interest. The principal amount is guaranteed, making it a safe investment.
Types of GIC
- Fixed interest rate bank deposits: They offer a fixed interest rate throughout the investment period.
- GIC variable rate deposits: The interest rate may fluctuate depending on market conditions.
- GICs subject to withdrawal: They allow you to withdraw funds before the deadline, but usually come with some penalties.
- Non-convertible GIC: They do not allow for early withdrawal of funds, but often come with higher interest rates.
GIC and Retirement Planning
For those approaching retirement, GICs can be an attractive option because of their low risk and guaranteed returns. But there’s an important aspect that many people don’t know: GIC income from insurance companies can be divided into retirement income.
Income distribution
Income splitting can be a significant tax saving strategy for retirees. In Canada, retirement income can be split between spouses, which reduces the overall tax burden. Interestingly, income from GICs from insurance companies qualifies as retirement income and can be split after age 65. Remember, a GIC purchased from a bank or credit union generates interest income, but CANNOT be split with a spouse/partner. Therefore, when there is a large income gap between partners, the high earner cannot transfer the interest income to the low earner.
Benefits of income sharing
- Reduces overall tax liability
- Equalizes income between spouses
- Maximizes tax breaks and deductions
How to Benefit from GIC Income Sharing
To take advantage of GIC income sharing, you need to invest in GICs offered by Canadian insurance companies. These GICs are offered by large companies such as Manulife, Sun Life, and Desjardins. This allows you to split your interest income, potentially saving thousands of dollars in taxes.
Example scenario
Consider a couple with a $100,000 GIC. If the GIC generates $5,000 in interest income, that amount can be split between the spouses. Instead of one person paying tax on the full $5,000, each spouse pays tax on $2,500, resulting in significant tax savings.
Retiring soon? Talk to us!
GICs are a safe and reliable investment option for Canadians approaching retirement. By choosing GICs from insurance companies, retirees can benefit from income sharing, reducing their tax burden. For personalized advice, consider consulting a financial advisor.
For more information, contact Bruce Youngblud. free 15-minute Zoom consultation.
