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Should You Renew or Cash in Your GIC?

bigstock-Green-Wheel-Barrel-Full-Of-Dol-5607013A GIC is a funding vehicle used to earn money on the principle invested with a guaranteed rate of return for a set period of time and many people appreciate the safety of investing their money in Guaranteed Investment Certificates (GIC). Now, if you invested your money into a GIC say five years ago, you may have been earning a 7% rate of return on your principle.  This looks wonderful compared to the current guaranteed interest rate of 1.5% to 2.0 % or so. Is now a good time to renew or cash in your GIC?

Although the principal amount invested is guaranteed, the interest earned on a GIC is taxable as income.  If the investor has a marginal tax rate of 22% then the real return on the GIC is lower than the original 7% guaranteed over the term of the GIC.  The realized rate of return is just under 5.5%.  And in the current GIC market the guaranteed rate of return is much lower than 7% and is hovering around 1.5 to 2.0%

So, does it still make sense to re-invest or re-invest your money in a GIC?

If funds are reinvested into a GIC, then the investor is likely going to lose money on their investment, as the interest earned is still taxable as income and the guaranteed rate of return on the GIC is hovering around the rate of inflation.  This may result in the principal actually being worth less than when it was locked into a GIC.

One might ask, “How can you guarantee your principal, get a decent rate of return and not pay income tax on the interest earned on the principal?”

There is a solution that a small percentage of savvy Canadians are taking advantage of.  As recently reported in this Globe and Mail article, only 9 % of Canadian prepay their eventual funeral arrangements.

With the current GIC interest rates being low, I think that prepaying eventual funeral expenses makes a lot of financial sense as well as providing emotional peace of mind for your loved ones.  You see, money invested in an Eligible Funeral Arrangement (EFA), is regulated by the Federal Government and there are several requirements in place that protect these funds.

First, money invested in an EFA is guaranteed to $100,000 and must earn tax exempt interest.  The funding vehicle for an EFA is currently offering from 2.2% to 2.5 % tax free interest on the funds in the EFA. Not only are the monies within the EFA protected and the interest is compounding within the certificate, the full financial savvy of prepaying one’s funeral is in the guaranteed of the future pricing.

In Ontario a licensed Funeral Home through a licensed funeral director, must guarantee all of the service and merchandise selections funded with the EFA.  This involves the work the funeral home will eventually provide for the deceased.  In addition, the merchandise selected is also guaranteed.  The merchandise can include the casket, or cremation container, a vault or an urn, the Floral Tributes, Memorial Cards or markers, the reception facilities and the refreshments.

Prepaying a funeral is a very savvy way to provide financial security to your loved ones and the peace of mind that there will not be a family feud over what type of funeral to provide or how this is to be paid for when the funeral is required.

If you are looking at a GIC renewal this fall,  it may work out to your advantage to use these funds to prepay eventual funeral arrangements and there are many funding options available including:

  1.  Single payment
  2.  A down payment with timed payments to follow
  3.  Timed payments over a set term from 1 to 15 years.

There are advantages and disadvantages to paying for the funeral over time. Be sure that you speak with a licensed Funeral Director who is well versed in the prepaid pre-need funeral arrangement options.

I’d love your feedback.  Don’t forget to leave a link back to your own blog too via the commentluv feature you’ll find here on the site.

Until next time,

Kat

 

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