As Canadians approach retirement, financial planning becomes crucial. One investment option that often comes up is the Guaranteed Investment Certificate (GIC). This article to provide a comprehensive understanding of GICs, especially for those nearing retirement.
What is a GIC?
A Guaranteed Investment Certificate (GIC) is low-risk investment offered by banks and financial institutions in Canada. When you purchase a GIC, you agree to lend money to the bank for a fixed period. In return, the bank pays you interest. The principal amount is guaranteed, making it a safe investment.
Types of GICs
- Fixed-Rate GICs: These offer a fixed interest rate for the term of the investment.
- Variable-Rate GICs: The interest rate can fluctuate based on market conditions.
- Cashable GICs: These allow you to withdraw your money before the term ends, usually with some penalties.
- Non-Redeemable GICs: These do not allow early withdrawal, but they often offer higher interest rates.
GICs and Retirement Planning
For those nearing retirement, GICs can be an attractive option due to their low risk and guaranteed returns. However, there is an important aspect that many are unaware of: GIC income from insurance companies can be split as pension income.
Income Splitting
Income splitting can be a significant tax-saving strategy for retirees. In Canada, pension income can be split between spouses, reducing the overall tax burden. Interestingly, GIC income from insurance companies qualifies as pension income and can be split after age 65. Remember, a GIC bought from a bank or credit union generates interest income but CANNOT be split with spouse / partner. Therefore, where there is a large disparity of income between partners, the high income earner cannot move that interest income to the lower income earrning partner.
Benefits of Income Splitting
- Reduces overall tax liability
- Balances income between spouses
- Maximizes tax credits and deductions
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How to Take Advantage of GIC Income Splitting
To benefit from GIC income splitting, you need to invest in GICs offered by Canadian insurance companies. Major companies like Manulife, Sun Life, and Desjardins offer such GICs. By doing so, you can split the 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, this 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? Chat With Us!
GICs are a safe and reliable investment option for Canadians nearing retirement. By choosing GICs from insurance companies, retirees can take advantage of income splitting, reducing their tax burden. For personalized advice, consider consulting with a financial advisor.
For more information contact Bruce Youngblud for a free 15-minute Zoom consultation.
