This is an updated post on managing your tax refund.
Congratulations – because you took advantage of tax credits and deductions, and you contributed more money to your Registered Retirement Savings Plan (RRSP) this past year – you got a tax refund back. Now the vexing question – what should you do with your tax refund? Instead of rushing out to blow your new found windfall (and you could of course!) consider these alternatives to spend your tax refund wisely this year.
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 or spend for yourself.
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. 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 next year.
Start an emergency fund
When you least expect it, emergencies happen. Things break down or need to be replaced. Instead of borrowing money during an emergency, consider using your tax refund to increase your emergency fund for the unplanned. Whether that amount is $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.
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.
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.
Don’t just take the money and run. Consider these alternatives to use your tax refund wisely this year.
Did you get a tax refund this year? What did you do with the money?
1. Reduce debt
2. Add to TFSA
3. To RRSP
With our tax refund (post to come) we choose to re-invest most of it into our RRSP. Mine is now fully maxed out 🙂
If the tax refund was generated due to an RRSP contribution just realize that that money is not technically yours. I read about so many people that are surprised and angry when they have to pay taxes when funds are withdrawn from their RRSP. It’s like they don’t have a clue how the program works.
@Lloyd: AGREE! RRSP’s are are a good retirement savings vehicle, but the withdrawals, especially if one has accumulated a large amount, will be taxed heavily at the highest rate. That’s why I think maxing out TFSA first will provide more future spendable income. Wish I had had that option.
Thanks cannew and as you know, I fully agree with trying to max out the TFSA as much as possible, as soon as possible.
Good point Lloyd and something I didn’t go into details on in my post, but I have covered it elsewhere, in other posts. Where possible, I think most people should reinvest the RRSP-generated refund. I think many Boomers might be in shock when they realize that 30% of the RRSP value is not theirs!
It is indeed a good question to ask: what to do with tax refund?!?
We are fortunate to be able to invest in for our retirement. Since we are working towards Financial Independence, we earmark the money for that.
In earlier years, it went towards emergency saving and mortgage reduction. These 2 goals are now under control.
I like the idea to use the money to invest in a skill. To be considered…
Good on you to earmark money specifically to retirement planning. Human capital is by far our greatest asset. It’s starts and ends with good health!
Every year, I get a huge tax return and use it to make my RRSP contribution for the year. This way, the surplus of cash does not sit in the checking account for to long!
Smart. I also know other people who take their RRSP-generated refund and fill up their TFSA. That’s a great strategy as well.
Getting a few grand back this year and putting on the mortgage. We put 10-20% into investments every month but when my wife and I get lump sums of money like tax refunds or work bonuses we usually go for a nice dinner and put the rest on our mortgage. I know there is a good chance we could get a better return on the money investing it but there is something about being mortgage free that’s worth more than returns. Besides if/when interest rates go up we’re a little bit ahead of it with each lump payment.
That’s strong work Ryan: 10-20% into investments every month.
We treat any raises or bonuses from work similarly. We treat ourselves but spend a good portion.
38 and started late, have to do what I can haha. I still feel it’s not enough.
We figure 15-20% savings rate will work for us for the next 10 years. That’s the plan! Otherwise, we’ll just have to plan to live off less or save more in our 50s prior to retirement. Good luck Ryan and thanks for reading.