What is a Certificate of Deposit in Canada?

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What is a certificate of deposit and why does anyone need it? Managing finances can be overwhelming for some people as there are several investment channels available.

Although some of these channels can be quite beneficial and help boost your finances, the risk and challenges involved can be a turnoff if not adequately managed. Let’s take a look at how one financial tool known as a certificate of deposit can improve your finances.

What is a Certificate of Deposit?

Also referred to as a guaranteed investment certificate, a certificate of deposit (CD) is a deposit financial tool sold by Canadian financial institutions. These products are aimed towards giving consumers a low-risk investment option. It is like an investment haven for people looking to invest towards their retirement.

A certificate of deposit provides a low-risk fixed rate of return for consumers, and the Canadian government insures them. Even when the financial institution fails, all investors’ money is insured up to CA$250,000 by the Federal Deposit Insurance Corporation (FDIC).

When you buy a GIC, your money is fixed for a duration, and interest will be accruing on the funds and the principal when the investment attains maturity. GICs offer higher interest rates than regular savings accounts, which is one of the reasons why most people leverage them for long-term investment.

Term Duration for Certificate of Deposit

Certificate of deposit has a fixed interest rate and term ranging from 3 and 6 months to 1 and 5 years. The funds in the deposit are held until it matures. The depositor can withdraw the money and accrued interest when it reaches maturity.

Note that the funds in this wallet cannot be withdrawn on-demand like those in chequing accounts. You might be penalized if you withdraw money from your certificate of deposit account before its due date. Penalties are a measure to ensure that interest holders keep to their part of the agreement.

Before your funds attain maturity, your financial institution will notify you. And as a holder, you have the option of withdrawing your principal and accrued interest or deposit the money into new CDs. The latter option is referred to as rolling over.

However, if your financial institution does not send a mail with the options mentioned above, your funds may automatically be rolled over. Note that you have the right to specifying when actions are to be taken at the time of maturity as a holder.

You can do this when opening CDs. Alternatively, you can arrange for the accrued interest to be sent periodically, mailed in the form of a check, or transferred into a savings or chequing accounts.

Buying a Canadian Certificate of Deposit

Once you have decided to buy a deposit certificate, do your research on the financial institution that offers the best GIC rates. Most prominent banks in Canada like TD Canada Trust, ING Direct, Royal Bank of Canada, etc., offers GICs.

Financial institutions’ interest rates may differ depending on the strength of the economy and the duration of the GIC. Calculate the amount you can afford to invest and ensure you have enough funds on hand before investing. This is because you cannot withdraw the money from the account before the maturity date.

Decide on the duration you want to invest in a GIC, as your investment length will determine your interest rate. GICs with the most extended terms usually generate the highest interest rates.

Once you are sure of the financial institution you’re signing up with, you can proceed to set up a secure electronic transfer to forward money from your account to the GIC of your choice.

Pros of Certificate of Deposit in Canada

Certificates of deposits are an excellent way to save either for the short or long term. However, it is more rewarding for those saving for the long term. Below are some of the perks that come with investing in certificates of deposits:

  • Principal and interest return is guaranteed.
  • All deposits are insured up to CA$250,000 by the Federal Deposit Insurance Corporation (FDIC).
  • More flexible than other saving tools
  • CDs are a lower-risk investment
  • An easier way to earn more interest
  • Added perks for existing customers of a financial institution

Cons of Certificate of Deposit in Canada

Even though CDs have some great benefits, below are some of their downsides you should be aware of:

  • Restricted access to funds until it hits maturity
  • Penalty for early withdrawal
  • Loss of principal due to inflation
  • Interest rates may be lower than other investment
  • Interest may be liable to tax

Conclusion

When it comes to saving and investing, several financial tools are available to choose from, certificates of deposits being one. Ensure to do thorough research on CDs and make a decision that suits your financial goals.

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Kareena Maya

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Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.