A guaranteed investment certificate — otherwise known as a GIC account — is similar to a Canadian savings account that accrues interest for a set period. 

As a U.S. resident, you may still be able to participate in GIC , but there are similar products that may be easier for you to manage. This article will explore GIC accounts and the available alternatives.

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What does GIC stand for?

Two investment products use the abbreviation GIC, so it’s important to distinguish between the two:

• Guaranteed investment certificates (Canada): This is a low-risk way to earn money by locking your money in with a Canadian financial institution for a set period. The Canada Deposit Insurance Corporation (CDIC) insures these GICs. 
• Guaranteed investment contracts (United States): This is an insurance company product that accrues interest and guarantees your principal. Unlike their Canadian counterpart, U.S. GICs aren’t protected by the Federal Deposit Insurance Corporation (FDIC). 

This article will focus on Canadian GICs.

What’s a GIC in Canada, and how does it work?

A GIC is a depository account that Canadian banks offer to qualified customers. Here’s how GICs work:

• Lump sum deposit: You invest a lump sum of cash. Most GICs have a minimum and maximum allowable amount. However, the CDIC only guarantees investments up to $100,000. 
• Fixed term: Your money is locked into the account for a fixed period, usually one to five years. 
• Accrued interest: Many GICs have a fixed interest rate, but other products vary based on market factors and institution-specific policies. 
• Return of principal: When the GIC matures, you receive your principal and accrued interest.

GICs’ predictability makes them a valuable tool for financial planning. Say you invest $10,000 in a three-year fixed-rate GIC at 4% interest, compounded annually. By the end of the third year, the total would be $11,249.

Types of GICs and their investment characteristics

GICs share many similarities with certificates of deposit (CDs), which is why most U.S.-based investors prefer CDs. There are many different types of GICs, and almost all have a CD counterpart.

Fixed rate GICs vs. CDs

A fixed rate GIC offers guaranteed growth, adding consistent interest to your principal at the end of each compounding period. The future value of a fixed rate GIC is always predictable. 

Many CDs work the same way. Imagine you invest $1,000 in a 4% five-year CD with annual compounding. It will be worth $1,040 at the end of the first year, $1,081.60 at the end of the second year, and so on.

Variable rate GICs vs. CDs

Variable rate GICs pay returns based on a specific benchmark, often the prime rate. For example, you may invest $1,000 in a GIC that offers prime plus 1%. So, if the prime rate is 4%, your return is 5%. At the end of a designated period, your interest rate can move up or down by the prime rate. 

In the U.S., floating rate CDs work the same way. 

Market linked GICs vs. CDs

With a market linked GIC, a specific index dictates your returns. However, most accounts offer principal protection, so you don’t lose your initial investment if the markets have negative returns. 

Structured CDs and indexed annuities also accrue interest this way. 

Registered and Non-Registered GICs vs. CDs

The concept of registered and non-registered applies to all GICs. Taxation works similarly to qualified and non-qualified annuities. 

Canadian investors buy registered GICs with pre-tax money and place them in registered retirement savings plans or tax-free savings accounts. These accounts are tax-advantaged, so investors can contribute more and grow their funds faster. On the other hand, non-registered GICs are purchased with post-tax money.

If you’re a U.S. investor who doesn’t pay income taxes in Canada, you must buy a non-registered GIC.

Cashable GICs vs. CDs

With most GICs, the bank locks your money into the account until maturity. However, cashable GICs allow you to withdraw your money without penalty. No penalty CDs are similar products.

Foreign currency GICs

Foreign currency GICs are valuable for Americans. You can buy them using foreign currencies, but you must have a banking relationship with a Canadian financial institution. These investments may not be as secure since exchange rates are always subject to change.

Pros and cons of GICs

Like any investment, GICs have benefits and drawbacks. Keep the following in mind before investing.

Pros of GICs

Principal protection

GICs are guaranteed investments with principal protection. Even during market downturns, your initial lump-sum payment is safe. 

Guaranteed returns

Fixed-interest GICs guarantee your returns, so they’re a predictable way to save. Even though variable and indexed GICs have changing rates, they protect your principal balance. 

Simplicity and low volatility

GICs are safe, reliable products with minimal volatility. They’re comparable to CDs, bonds, and annuities in this regard. 

Government deposit insurance

The CDIC insures GICS up to $100,000. Even if the bank fails, your investment is safe.

Cons of GICs

Low returns

A GIC is a low-risk investment, so it doesn’t offer the potential for higherreturns of other assets, such as mutual funds, index funds, and stocks. Inflation can also outpace GIC interest rates, which reduces the value of your investment. 

Limited liquidity

Your funds are unavailable for the term of the contract. Like CDs, there’s a penalty for early withdrawal. 

Taxable interest

If you have a non-registered account, you’ll have to pay taxes on the interest. 

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GICs vs. annuities: What's the difference?

Annuities are insurance company investment products with a similar structure to GICs or CDs. During accumulation, your money grows according to fixed, indexed, or variable rates. However, they disperse regular monthly payments once they reach maturity, often for life. This payout structure is why some investors call them income annuities. 

Interest rate structure

Both GICs and annuities have fixed, variable, and indexed interest rate products. 

Liquidity

GICs lock in your money for the term unless you choose a cashable product. Annuities may allow early withdrawals but sometimes have surrender charges. 

Gainbridge has annuities that allow you to withdraw up to 10% of your investment value annually after the first year without penalty. 

Insurance and guarantees

The CDIC backs GICs, making them an extremely safe investment. Annuities don’t have federal backing, but the issuing insurance company and state guaranty associations protect your principal. 

Use in retirement income

GICs pay in a lump sum at the end of the term. Strategies like laddering can help stagger the disbursements, but they’re complicated for the investor. Annuities pay a guaranteed income stream once they mature, which you can use to supplement Social Security and other investments. 

Tax treatment

You can purchase both GICs and annuities with pre-tax and post-tax dollars, affecting how much you’ll owe during tax season. 

U.S. investor accessibility

GIC investments aren’t typically available to U.S. investors unless they have an existing Canadian banking relationship, partial residency in Canada, or a foreign currency GIC account. Annuities are widely available in the U.S. 

What are the best GIC alternatives in the U.S.?

If you like the GIC investment model but live in the U.S., you may consider the following options:

• Fixed annuities: These products offer a fixed interest rate, tax-deferred growth, and principal protection. One of the benefits of annuities is you can elect to annuitize your contract to provide for a guaranteed income stream. 
• CDs: CDs work like GICs, and the FDIC insures them for up to $250,000. 
• Stable value funds: This type of fund invests in safe, low-risk investments, like bonds and annuities. For this reason, it’s a viable alternative to a GIC fund — a pool of GICs for Canadian group retirement plans that aren’t available in the U.S.

Grow your retirement income with Gainbridge

While a Canadian GIC account may not be available to you, Gainbridge offers a modern, accessible alternative through fixed annuities. With Gainbridge, you get:

• Principal protection
• Predictable interest
• Flexible contract terms
• Retirement-focused design
• 30-day money-back guarantee

Or, if you aren’t interested in tax-deferralexplore FastBreak™, our non-tax-deferred annuity with flexible access, which operates similar to a CD or GIC. It could be an ideal option if you want stability without locking up your funds for decades. 

Learn more about Gainbridge’s annuities

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as individualized investment, legal, or tax advice. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes.

Guarantees are subject to the financial strength and claims paying ability of the issuing insurance company.Annuiites are  issued by Gainbridge Life Insurance Company, located in Zionsville, Indiana. Annuities are long-term investment vehicles and contain terms for keeping them in force.

Certificates of Deposit (CDs) and non-tax deferred annuities are distinct financial products, each with their own characteristics and purposes. CDs are deposit accounts offered by banks and credit unions, insured by the FDIC or NCUA. FastBreak™, on the other hand, is an insurance product offered by an insurance company.