What to do with a Tax Refund

Sunday, June 10, 2012

If you are fortunate enough to be receiving a tax refund this year, you may want to consider how to spend that new found money (if you haven’t already).

Many people like the idea of “free” money, and the idea that they didn’t have to put in extra hours to get this new found money. The Canadian Revenue Agency (CRA) does allow for Canadians to save some of their money with a break in interest in a Tax Free Savings Account (TFSA) and allows them to decrease their taxable income by allowing Canadians to deposit some of their hard earned money in a Registered Retirement Savings Plan (RRSP). By decreasing your taxable income, you can actually save more money as this is less money the government can tax you on. For example, if you were to earn $40,000 per year, and were able to put $5000 in an RRSP, then your taxable income would be $35,000. Most people pay income tax every pay cheque, so when you can lower your taxable income at the end of the year, then most people will be able to receive a tax refund from the government (due to the fact that they have overpaid during the taxable year).

So, if you are one of the fortunate to be receiving a tax refund, what should you do with the money that you receive back from the government in the form of a tax refund?

There are several options that you can choose from, and it will depend on what you would like to do with the money. For example, would you like to re-invest this money, or would you rather treat yourself with this new found cash?

Here are some ideas for spending and saving that tax refund:

  • Re deposit the money into your RRSP to start saving for retirement and reduce your taxable income for next year!

  • Deposit the money into your TFSA to save your money interest free!

  • Meet with a financial advisor and invest your money.

  • Pay off any pre-existing debt (credit cards, car loans, mortgage).

  • Take the money to make repairs around the home (such as fixing steps, driveway), or by buying something for the home (lawn mower).

  • Buy something for yourself or your loved one. (Have you been eyeing a plasma flat screen television?)

  • Take a trip!

  • Invest in your favorite hobby (buy that new bike!)

  • Attend a major sporting event

There are plenty of ways to spend your tax refund, the choice is up to you!