How we spent our tax refund this year – 2018
Some time ago I offered up a simple question for readers to consider: What would you do with $1,000?
In that article I shared what I’d do with that tidy sum if it found me.
Well, many weeks ago – we got our tax refund back. And while it was more than $1,000 it certainly wasn’t found money. Far from it. A tax refund is a mixed blessing really. On the good side, we were given money back. On the downside, a tax refund means we just gave our government an interest-free loan over the last year.
Looking for a big tax refund year after year is not ideal friends.
On that note, I think getting a huge tax refund is undesirable and many Canadians should not welcome this although I know many people do.
Before I share what we did with our tax refund in 2018, here are some of the great things you can do with yours if not already spent!
1. Pay off credit card debt
Yes, boring, but the sooner you rid yourself of consumer debt the sooner you can enjoy the money you make. I always believe the money you don’t have to pay others is the money you get to keep for yourself – isn’t that better?
2. Save for retirement
Article after article highlights most of us aren’t saving nearly enough for retirement. After your credit card debt is zero, consider using your tax refund to pay for your future self. We do this but your mileage might vary. We believe saving for tomorrow is not only smart but if you sock some or most of your tax refund into your RRSP, you’ll be well on your way to getting an even bigger tax refund to cycle into your RRSP next year.
3. Start an emergency fund
When you least expect it, emergencies happen. Our fridge recently died. That sucks but I’m glad we have a small emergency fund to cover the expense. Whether your emergency fund is valued at $1,000, $5,000, $10,000 or more, a separate fund to draw from when you need it the most will provide piece of mind.
4. Make an extra mortgage payment
By making just one mortgage prepayment you’ll likely save the interest paid over the life of your mortgage by thousands of dollars.
5. Invest in you
Want to improve your skills for the workplace? Want to turn your hobby into some side-income? Consider using your tax refund to invest in the most important asset you’ll ever own – you. Investments in you are always worthwhile.
6. Invest inside your TFSA
The Tax Free Savings Account is a gift to every adult Canadian! Consider using your tax refund to invest inside this account – since there are many great things you can do with your TFSA.
Sure, there are more options but these are solid choices near the top of my list.
What did we do this year? Did we eat our own cooking? You bet.
Since we’ve decided to make a major lifestyle change next year, we decided to throw almost every penny on existing mortgage debt. We believe paying down our mortgage is one of the best investments we can make. Sure, you might argue a mortgage rate below 3% is peanuts (and we could get a far greater return on our investments; beyond 3% when invested in equities) but last time I checked few people ever went broke without being in debt.
This decision also aligns very nicely with these financials goals with our TFSAs already maxed out and fully invested in many Canadian dividend paying stocks. My RRSP is also out of contribution room.
When it comes to saving and investing, our principles are boring and rather simple but I’ve learned being boring when it comes to money management is exactly the right thing to do to be successful long-term. This year our tax refund was directed to debt. Next year it might be different. Stay tuned to this channel to learn about what we do in future tax refund years; as we strive to build wealth and rid of ourselves of debt at the same time.
How did you spend your tax refund this year? What do you make of our choices?
Thank you for taking the time and writing this post.
keep up the great content, I really enjoy your blog………
Thanks James 🙂
Comment on Owen’s comment. Yes there may be taxes later due to withdrawals but the fundamental principle is that you put in to RRSP at a higher tax rate than you withdraw at. So the overall idea is that there will be net tax savings. It’s important that people figure out if this will be true for them. Also if you die without a spouse your entire RRSP is collapsed and taxable in that one year. Really bad if you die young and have large RRSP. A good idea is to do some projections each year to determine the best way to invest (RRSP vs TFSA). But it wouldn’t hurt anyone to have a separate TFSA to deposit the refund and then there should be enough to pay any taxes in future plus tax free growth. The key is planning and not blindly stuffing money into an RRSP chasing a refund. Finally I am working with my mom right now to get her to increase her RRIF withdrawals while she has a DTC transfer from her husband plus the caregiver amount. He is older than her and not in the best health so when he dies she loses almost $10K in tax credits. That combined with reduction in combined CPP will be a big financial hit to her. Unfortunately in doing the extra withdrawal she gets hit with the stupid Ontario medical premium which is proportionally a huge increase to her vs the max $900 for high income earners. (Sorry a bit of an Ontario tax rant).
All of the above to say that people need to look ahead. Things may change but at least there was a plan.
Good comment Susan.
Interestingly enough, recently working with my parents to figure out their tax situation as well…re: get them to increase their RRSP withdrawals; reduce taxable liability before they are forced to RRIF.
Nothing wrong with any sort of Ontario tax rant. I’m fed up as well.
Retired now so RRSP is not an option. I do max out the TFSA as I consider it to be my emergency account.
managed to get money back both last year and this year.
Killed a few dogs in the non-registered accounts so that helped balance the cap gains. OAS was also being clawed back so that counted as a tax paid. Had worked six months in 2017 so I got to contribute to my RRSP one last time.
Smart to max out the TFSA. Well done!
As long as you don’t spend your tax refund on “things” I think it’s all good. Totally makes sense to use the refund to pay down debt.
We almost always got tax refund due to RRSP contribution and child care tax credit. For a few years, DH has applied to not deduct the tax refund from RRSP in his paycheque and ends up with paying installment over the year. DH always forgot to pay installments and it took too much time and energy and he stopped to do that.
Any tax refund either used to pay down debt (when we still had some) or directly go to savings/investing.
Always interesting to hear how others are doing. No refund this year and, in fact, a BIG tax hit after impulsively selling off some mutual funds I’d held for years after doing a slow burn about the high MER I was paying. Probably not very smart of me. The cash I handed over to Rev Canada as a capital gain is not available for investing; I had to pay interest on the outstanding tax I owed but hadn’t made installment payments on; and I had to leave a chunk of the cash from the sale just sitting there from the time I sold it in anticipation of the tax hit. Those opportunity costs far outweigh the ~ 2% over an ETF MER I’ve been paying.
I know it’s always better to have a capital gain than a loss but it’s still this was an ouchy! So, while I would never buy into a mutual fund again, I guess I’ll just suck it up and leave my remaining investment there.
You got it… “I know it’s always better to have a capital gain than a loss…” That means you’re doing something right 🙂
Our refunds were not significant this year (blind luck) so they just went into the general revenue. Normally we would expect to pay. As to Mark’s preferred choices, I like them all and which order would depend a lot upon the personal circumstances.
Thanks Lloyd. I would say when in doubt, kill debt personally but that’s my conservative bias.
When I was owing on the HELOC that’s what I did too. We used it to buy our daughter a house and paid it off in a couple of years so getting rid of that debt was a no brainer. That was pre-TFSA but I think I’d still probably go with eliminating debt first. Having said that, I did have the option of accepting more overtime if I wanted it so if the TFSA was an option I might have done both.
ooops, I erred. We did buy the house when the TFSA existed. I just checked the records and we did do both (TFSAs as a monthly contribution and anything extra to HELOC).
Ya, I get torn sometimes but my wife and I are starting to approach a decent spot whereby TFSAs are maxed and my RRSP is maxed, just her RRSP to go. Then, we’ll be cookin’!
I gave thousands to the Gov when I filed. No thank-you and they spend it foolishly. If I did not have so much family here – I would move.
I gave thousands but thankfully my wife got some back to offset! All the best Mike.
Sound advice Mark. Like many in retirement we are trying to minimize the amount we will have to pay over our installments.
Sounds about right. My parents owe taxes in installments now. I hope to avoid that later but we’ll see!
Just roll the RRSP refund back into the RRSP and get a head start on next years. 26k can be tough for some folks to come up with, + the 5,500 for TFSA + 2500 / RESP. That’s a lot of money to save for many folks.
Just a comment about paying down mortgage: “but last time I checked few people ever went broke without being in debt.” Are you really in debt IF your net liquid assets are more than your debt? Also Mark what is your Debt to Equity and Debt to Net Worth numbers? Or perhaps save that calculate for a future post to teach people how to calculate it for themselves.
Good to hear from you Brett.
re: Are you really in debt IF your net liquid assets are more than your debt? Well, yes, since it’s money I owe.
Now is the question should I really be concerned if my net liquid assets (e.g., investments not house) are > debt? Maybe not. I know for us, the less debt I have now the better I feel.
re: “Mark what is your Debt to Equity and Debt to Net Worth numbers?”
Well, I don’t share my net worth on this site for many reasons but if you include some PV of our pensions, let’s say I think, overall, it’s “good” for a 40-something but I cannot retire yet. You are welcome to guess!
I know what you said. For us, it’s two RRSPs, + 2 X (5500 + 2500). After that, even we do not save one cent, our after tax saving rate is already quite high I believe. It’s easier for double income, even harder for single income.
Anyone who contributed to their RRSP with after-tax dollars should definitely put that tax refund into their RRSP as well. Otherwise they would have been better off putting that money in their TFSA instead.
Many people don’t realize that the RRSP refund you get from an after-tax contribution is actually just a loan from the government and they want it back (with interest) when you withdraw from your RRSP. If you end up spending that refund you still owe tax in 30+ years when you withdraw.
If you normally spend your tax refund then definitely consider maxing out your TFSA first.
I’ve always been a big fan of using the tax refund for the RRSP or TFSA. Debt is also good too 🙂
While I didn’t loan anything to the government, I had to pay several thousand this year. That’s also an ouch! We sold stuff from a non tax protected account to pay deck and kitchen upgrades. On the upside, everything we sold was in the green as there was nothing in the red to balance things off. Doing more upgrades this year so we’ll take off a little tax from CCP and OAS. See how that works.
Pay now, pay later, re: taxes. They have us Paul!! Thanks for sharing.