RSP vs GIC
RSP and GIC are both instruments for saving in Canada. Saving is always good for your future and there are many saving plans. RSP is intended to be of help especially after retirement whereas GIC can be used for requirements of money in the near future and it is not generally meant as a vehicle of saving for retirement. RSP has several tax advantages which is why it is so popular among the people.
As a retirement saving plan, you contribute to it from your salary and your contributions are exempt from tax, thus resulting in a tax savings for you. The money keeps on growing earning interest and remains tax free until you withdraw at the time of your retirement. One can get a RSP from a Bank, Investment Company or any Insurance Company. Introduced by the Canadian government in 1957, its main purpose is to encourage individual to save for their retirement as pension from the government may not be able to sustain for a comfortable living.
Guaranteed Income Certificates or GIC as they are called are saving instruments issued by banks and trust companies. They carry certain interest which is often higher than normal saving accounts. They are of two types. Cashable GIC allows cashing out before the term but the interest rate is low. Locked-in GIC does not allow you to cash out before the completion of the term and carries a higher rate of interest. The interest earned in a GIC is taxable. GIC is a term deposit and the term is often 5 years, but you can get a GIC for any term from 1-10 years according to your wish. Banks pay a higher interest on a GIC as they have control over your money for the time period of the term of the GIC. You can get a GIC for $1000 to $100000. You can get a GIC when you have a lump sum while you can contribute as much or as little annually to your RSP.
Difference between RSP and GIC
Both RSP and GIC are instruments of saving for the future, but there are differences relating to term, withdrawal and tax benefits. While RSP is mainly intended for retirement, GIC is a term based certificate that earns you money for the near future. RSP can be opened anytime and the contributions to the fund are tax deferred. The interest earned is also tax free until you start receiving distributions. This is an attractive feature which results in current savings which otherwise go as income tax. This explains the popularity of RSP. When you open RSP, you eye on the benefits that accrue when you eventually retire. But with GIC, you know that it is a term deposit and also that you will be getting the money with interest after the completion of the term.
RSP is retirement saving plan while GIC is a term based certificate, generally the term is 5 years, but it varies from 1 to 10 years.
RSP can be opened anytime and the contribution to RSP and the interest earned are tax deferred.
If the GIC is locked in type, you cannot withdraw money from it until its completion while it is possble to withdraw money from RSP subject to taxation. However, there is no gainsaying that both RSP and GIC are nice investment options. But if you are eyeing tax benefits, you should opt for RSP. GIC is especially good if you are nearing retirement.