GIC vs TFSA: Which is better?

Guaranteed investment certificates (GICs) are low-risk investments that provide a guaranteed return on the money you deposit. Tax-free savings accounts (TFSAs) are accounts that can hold many different kinds of investments, including cash, mutual funds, stocks and bonds.

So should you invest in a GIC, open a TFSA or both? Keep reading for a GIC vs TFSA side-by-side comparison.

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What is a GIC?

A GIC is a low-risk investment that pays interest on the money you deposit. You agree to invest your money with a financial institution for a specified period of time, and in return you’re paid a fixed rate of interest and get your principal back when the term ends.

Terms range from 30 days to 10 years, and GICs are useful to help you reach short-term savings goals. They generally come with fixed interest rates, but market-linked GICs with variable rates are also available.

Traditional GICs are non-redeemable, which means you’ll need to pay a penalty if you want to access your money before the term ends. If you’d like the flexibility of being able to make an early withdrawal, you could opt for a cashable or redeemable GIC — but you’ll need to settle for a lower interest rate.

Dive deeper: Complete guide to GICs

What is a TFSA?

A TFSA is a registered savings account that does exactly what it says on the tin — allows you to build your savings tax-free. But rather than just holding cash, a TFSA can be used to hold stocks, ETFs, bonds, mutual funds and a range of other investments. Best of all, you don’t need to pay income tax on any interest or capital gains earned from investments held in your TFSA.

TFSAs are available through banks, credit unions, trust companies and insurance companies. You’ll need to be 18 years or older and have a valid SIN to open an account, and there’s a limit to how much you can contribute to your account each year — $7,000 as of 2024, but any unused contribution room can be carried forward to the following year.

Dive deeper: Complete guide to TFSAs

GIC vs TFSA: What’s the difference?

While a GIC is a type of investment, a TFSA is an account you use to hold investments — including GICs. So while a GIC is a single investment, you can use a TFSA to gain exposure to a wide range of investments.

There are a few other key differences between GICs and TFSAs, so let’s see how they compare across a few key categories.

GIC vs TFSA: Which offers better returns?

A TFSA offers the potential for better returns, but returns aren’t guaranteed.

GICs are safe investments that provide steady returns — as of August 2024, one year GIC rates of around 4% to 5% are available — but they generally don’t have the same potential for large growth provided by other TFSA-eligible investments like stocks, ETFs and mutual funds. That said, market-linked GICs may be able to offer better returns than traditional GICs.

The benefit of a TFSA is that it lets you create a diversified portfolio of investments, spreading your risk around. And you won’t pay tax on the income you earn from the investments you hold in a TFSA, helping you build your balance faster.

GIC vs TFSA: Which is more flexible?

TFSAs offer much more flexibility than GICs. The money you put in a TFSA can be held in different types of investments, including stocks, ETFs, mutual funds, bonds, cash and GICs. You can also take money out whenever you want if it’s held in cash.

But the annual contribution limit reduces the flexibility of TFSAs, as you’ll be hit with a fee if you exceed your limit. GICs, on the other hand, don’t have maximum investment limits.

If you have a non-redeemable GIC, you’ll typically have to pay a fee if you make a withdrawal before maturity. Cashable GICs will let you take your money out at any time without a fee. The only downside is that they typically offer lower interest rates than non-redeemable GICs.

Pros and cons of GICs

Pros and cons of TFSAs

Bottom line: Should I invest in a GIC or a TFSA?

Ultimately, both GICs and TFSAs can come in handy for Canadians who want to grow their savings.

A TFSA is an extremely useful tool that lets you build tax-free savings for short- and long-term financial goals. It allows you to create a diversified portfolio of investments, combining low-risk assets with higher-risk investments to help build your wealth.

GICs offer a safe and secure way to earn interest income, either inside or outside of registered accounts. And if you hold your GICs in a TFSA, you won’t have to pay tax on the interest you earn.

Just be sure to consider your risk tolerance, investment goals and time frame before deciding on the right products and accounts for your needs.

Frequently asked questions: GIC vs TFSA

• How are TFSAs different from GICs?

  How are TFSAs different from GICs?
  TFSAs are savings accounts that can hold a wide range of investments, including cash, stocks, mutual funds, bonds and more. You can only deposit $7,000 per year to a TFSA (as of 2024) and any interest you earn is tax-free.

  GICs pay competitive interest rates for locking your cash in over a fixed term. These investments also guarantee the return of your principal and deposits are insured up to $100,000.

• Can I invest in a GIC through a TFSA?

  Yes, GICs can be held in a registered account like a TFSA. Investing in a TFSA GIC allows you to take advantage of the fact that you won't have to pay tax on the interest you earn. However, the annual contribution cap on TFSAs may mean that you are unable to invest as much money as you want in your TFSA GIC.

• How does a TFSA GIC work?

  TFSA GICs are simply tax-free term deposits that are held in your TFSA. They function just like any other GIC except you won't have to pay tax on the interest you earn. This means you have a higher earning potential with a TFSA GIC than you do with a taxable GIC.

• What happens if I over-contribute to my TFSA?

  If you exceed your TFSA contribution room, the CRA will impose a tax rate of 1% of the highest excess amount for each month or partial month that your account has excess contributions. The tax will continue to apply until the entire excess amount is taken out of the fund or is absorbed by additions to unused TFSA contribution space in the following years.

• Can I apply for a GIC or TFSA online?

  Yes, you can apply online with the provider of your choice.

• Are GICs tax-free in Canada?

  You'll pay tax on the interest income you earn from a regular GIC in Canada. But if you hold the GIC in a TFSA, you won't pay any tax on the interest you earn.