What to do with your tax refund
Save it, spend it, or do a bit of both – we’ve got ways that may help you stretch your tax refund.
While not everyone looks forward to tax time (who really likes filling out forms anyways?), for many Canadians it means they can expect a refund on money paid in taxes. Whether it’s from investing in a registered retirement savings plan (RRSP) or overpaying on income tax, many Canadians will receive money back at tax time. Which begs the question – what to do with your income tax refund?
When a windfall happens, it can be human nature to imagine spending it on something fun right away. You get that holiday bonus, and it can turn into plane tickets oh so easily. We totally get it — but taking a second to put your tax refund toward your financial goals could pay off big time in the future.
Luckily, there are several ways you can turn your tax refund into a smart investment into your financial future. Here are three of them to consider for this tax season:
Pay off debt
Paying off debt, especially the high-interest kind, can be one of the best possible ways to reach your financial goals. Many credit cards charge nearly 20% interest on debt – very, very few investments can guarantee a return anywhere close to that. If you want to spend money in a way that benefits your financial future, paying off any outstanding debts first is a great place to start.
When you receive your tax refund, take an accounting of your outstanding debt, and prioritize paying it off based on what incurs the highest interest most quickly. Credit cards are often at the top of the list, with lines of credit, student loans, auto loans and mortgages being considerations for many.
Create an emergency fund
Being financially ready for an emergency can be a big stress relief. Whether it’s job loss, illness or accident, we’re all likely to experience an unexpected event that’s going to cost something. Luckily, if you’ve been proactively setting aside money, these occurrences don’t have to be a financial burden.
Your tax refund can be a great start to your emergency fund, or top it up if need be. You should consider keeping the money somewhere fairly accessible where you won’t have to pay a fee to access it. That said, you’ll want to keep it somewhere that does accrue interest, like a high-interest savings account.
Save for retirement or other financial goals
Putting your tax refund money aside for your retirement is a great idea for those prioritizing their financial future. The more money you’re able to put away now, the more flexibility you’ll have when you’re planning your retirement. There’s a few different routes you can take when saving for retirement, depending on your goals and timeline.
For many, a contribution to their RRSP is a great way to invest a tax refund. For one, any money you contribute to an RRSP will be deducted from your taxes for the next year, meaning you’ll have a better chance at a refund. Any money you invest with an RRSP will be allowed to grow without being taxed on that growth – you’ll only be taxed on the money you withdraw once you’re retired.
Another option to consider is adding your tax refund to a TFSA. While money you put into a TFSA won’t be deducted from your annual income, you aren’t taxed on any income, capital gains and dividends earned and you aren’t taxed when you withdraw money from them. Plus, you can keep adding money well into your 70s and 80s – there’s no upper age limit on a TFSA unlike an RRSP.
Regardless of where you keep your money for retirement, investing money (especially money that falls outside your day-to-day budget, like a tax refund) is a great way to set you up for the retirement of your dreams.
Now’s the time to start thinking about what to do with your tax return
For many Canadians, tax time means they can look forward to a refund on money they’ve overpaid. Of course, not everyone will receive money back at tax time. If you do get a refund, it’s a great time to really think about how that money can best be spent. It might be a good idea to connect with a financial advisor to learn how you can make the most of your tax return. In fact, you may have access to a PlanRight advisor through your plan at no additional cost to you. Check with your employer to see if this benefit is part of your group plan.
Everyone has different financial goals, so it’s important to consider your individual circumstances. But paying off debt, building an emergency fund, saving for retirement and spending on causes that matter to you are all good things to consider putting your tax refund towards. And if you’re able, dividing up your tax return and contributing to a variety of your goals could be very worthwhile.
