5 Smart Moves to Make with Your Tax Refund

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April 16, 2018

It’s tax season and it’s exciting… you’re excited right? I’m just kidding, it’s not that exciting.

Unless, however, you have been informed by your accountant that you will be receiving a cheque from the government in the form of a tax refund in a few weeks’ time. Sweet, right?!

Why do you get a tax refund?

First of all, you may or may not know this, but your tax refund is just that, a refund. Before you get too excited and start thinking about how you’re going to spend that money on something new and shiny, like a 70’’ 8K resolution TV to replace your “way too small” 55” 4K resolution TV, hear me out.

The reason why you’re getting a cheque in the mail from the government is because you paid too much in taxes last year. It’s nice that you’re getting this money given back to you; however, you essentially gave the government an interest free loan and they are simply returning it back to you, interest free. Not a super awesome deal for you.

If you’re consistently getting a large tax refund cheque each year, I would suggest submitting a T1213 E form to the CRA. This is essentially an application to reduce the amount of taxes being deducted from your paycheque. The most common reason for getting a tax refund cheque is because you have been making regular contributions to your RRSP (way to go!). Other reasons may include deductions or credits in the form of child care expenses or support payments (one example).

This will be a great move to make for the upcoming year. In the meantime, commit to spending your refund (the money you lent to the government) wisely.

Let’s get to it - 5 smart moves to make with your tax refund!

1. Emergency Fund

I don’t think I need to get into the stats but the large majority of us don’t have a sufficient amount of money saved for emergencies. I’m not going to throw the usual rule of thumb at you and say you should have 3 to 6 months of income saved as I believe everyone's situation is different.

However, if you don’t have an emergency fund or if you feel as though your current emergency fund isn’t going to sufficiently get you through an emergency, an actual emergency, like losing your job and needing 5 months to find the next one, then you would be wise to throw your refund into an account and name that account your Emergency Fund.

2. Right back into your RRSP

It’s very likely you’re getting a refund because you contributed to your RRSP account. Why not double down and invest your refund right back into your RRSP?

This is a great move! You’re committed to saving diligently for your future and better yet, your refund (along with your normal RRSP contributions) will further reduce your overall taxable income. That’s a win!

3. Tax Free Savings Account (TFSA)

You may be at a point where you have maxed out your contribution space and can’t put any more into your RRSP. Another great option is to stash your refund away into your TFSA.

TFSA accounts are such a great account for building your wealth. Although your contributions to your TFSA won’t reduce your taxable income, the interest earned on your investments within your account can be drawn out at a later date tax-free.

4. Make an extra mortgage payment

I love this one! If you’re getting a couple thousand dollars back from the government, it would be a smart move to make a lump sum payment toward your mortgage. Making these larger lump sum payments towards your mortgage can knock years off your mortgage and will save you thousands of dollars in interest over the long term.

I get it, this doesn’t sound as fun as buying something new and exciting in this present moment. However, if you’re serious about growing your wealth, this is a power move.

5. University Fund for the Kiddos (RESP)

This won’t apply to everyone of course, but if you have children and have been thinking about putting away some money for their future education costs, now may be a great time to consider opening an RESP (Registered Education Savings Plan). On the other hand, you may already have an RESP account set up for your children and could make a further contribution.

This is a great way to save for their future and the government offers some great RESP grant programs that you can apply for when you make contributions to an RESP.

On the other hand, we are human…

I get it! There are likely other, much more exciting ideas for how you could spend your tax refund cheque. If you feel you absolutely need to use your refund on something like a vacation or a bathroom renovation, that could be okay too. Just ask yourself this one question first: “If I had received this refund in the form of a higher monthly pay cheque throughout the year, would I still have set this money aside for X? (vacation, bathroom reno etc.)”.

If the answer is yes, then maybe that is the route you go. If it’s no, it’s probably a sign that you should consider one of the options above.

Questions? Feel free to drop me an email, always happy to chat!

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