A 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%
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