What is the Difference Between RSP and GIC?
🆚 Go to Comparative Table 🆚The main difference between a Registered Retirement Savings Plan (RRSP) and a Guaranteed Investment Certificate (GIC) lies in their purpose, tax benefits, and investment structure. Here are the key differences:
- Purpose: An RRSP is a government-registered account designed to help Canadians save for retirement, offering tax benefits on contributions and tax deferral on investment earnings. A GIC, on the other hand, is a type of investment where money is deposited with a financial institution for a predetermined period of time and guaranteed to earn interest.
- Tax Benefits: Contributions to an RRSP are tax-deductible, and the investment earnings within the RRSP are tax-deferred until withdrawal. GICs, whether held inside an RRSP or not, do not offer tax deductions on contributions. However, when held within an RRSP or other registered accounts like Tax-Free Savings Accounts (TFSAs), the interest earned on GICs is tax-free.
- Investment Structure: RRSPs can hold various investments, including stocks, bonds, mutual funds, and GICs. GICs are a specific type of investment that provides a guaranteed return over a fixed period. RRSP GICs are non-redeemable, meaning the money must stay in the RRSP until the investment matures or penalties will be incurred.
- Withdrawal Restrictions: Money in an RRSP cannot be withdrawn without penalty until the account holder retires or reaches a certain age. GICs, when held outside an RRSP, can be redeemed before maturity, but penalties may apply.
In summary, an RRSP is a retirement savings plan with various investment options, including GICs, offering tax benefits on contributions and tax deferral on earnings. GICs are a specific type of investment offering guaranteed returns over a fixed period, and when held within an RRSP, provide tax-free interest earnings.
Comparative Table: RSP vs GIC
Here is a table comparing the differences between a Registered Savings Plan (RSP) and a Guaranteed Investment Certificate (GIC):
| Feature | RSP | GIC |
|---|---|---|
| Tax-sheltered | Yes | No (interest earnings are taxable) |
| Contribution Limits | Set by the government, based on income | None |
| Investment Options | Various, including GICs, stocks, bonds, and mutual funds | Limited to fixed-interest investments |
| Liquidity | funds can be withdrawn, but taxes and penalties may apply | Funds are generally locked in for a set term |
| Principal Protection | Yes, within a tax-advantaged account like a TFSA, FHSA, RRSP, or RESP | Yes, if purchased at a significant Canadian bank or credit union |
An RSP is a tax-sheltered retirement savings account that allows you to contribute up to a certain limit based on your income. Investments within an RSP grow tax-free until you withdraw the funds, at which point they are subject to taxes. An RSP can hold various investments, including GICs, stocks, bonds, and mutual funds.
A GIC is a fixed-interest investment that guarantees the principal amount invested. GICs are generally purchased for a set term, during which the funds are locked in. The interest earned on a GIC is taxable if it is not held within a tax-advantaged account like an RSP.
In summary, an RSP is a tax-sheltered retirement savings account that can hold various investments, while a GIC is a fixed-interest investment with a guaranteed principal amount. The interest earned on an RSP is tax-free until withdrawal, whereas the interest earned on a GIC is taxable.