Thank You Mister Tax Man

You received your tax return today!

Now, what should you do? That new 3D smart TV would look great in the living room! Or a trip down South would do wonders in helping you forget the long arduous winter we’ve just experienced.

Although the urge to spend this sudden windfall today may seem irresistible, you should take a few breaths and consider options that will make that money work for you.  The following are a few alternatives that will give you the most bang for your refunded buck.

Dig yourself out of the hole and pay down high interest debt: If you have high interest loans or credit cards with large balances, you may want to strongly consider paying these down with your refund. With credit cards typically charging 19 to 21% on unpaid balances, you are unlikely to find an investment that will guarantee you a higher return to justify investing rather than paying off debt.

Invest in your Registered Retirement Savings Plan (RRSP): If you are receiving a refund, an RRSP contribution is maybe what caused it. If you are in a high tax bracket and have the available contribution room, an RRSP could be the perfect new home for your tax refund. The two advantages of an RRSP contribution are that it provides tax free growth, in addition to allowing you to defer taxes payable to retirement where your tax rate should be lower. If you do not reinvest the tax return initially created by an RRSP contribution, you may not be taking full advantage of your RRSP plan.

Consider investing the proceeds in a Tax Free Savings Account (TFSA): For some people investing in an RRSP is not ideal. If your income is currently below where you project it to be at retirement, you may want to look at maximizing your TFSA. Similarly to an RRSP, this account allows you to earn investment returns tax free. Although you receive no tax deductions, you are consequently not taxed on withdrawals.  

Feed your brain by investing in education: If you have children, you may want to help them with a portion of their schooling costs. By catching up on Registered Education Savings Plan (RESP) contributions, you can receive up to a 20% matching contribution from the Canadian Government in the form of a Canadian Education Savings Grant (CESG). That’s an impressive rate of return on investment, without taking any risk.

Alternatively, you can spend the funds on your own education to help in transitioning to another career or improve your current skill set to move up the corporate ladder. This will pay off in the long run.

Pay down your mortgage: For most people, their home is their largest asset. Using your tax return to pay down your mortgage will not only give you a guaranteed rate of return, but it will also insure that you are mortgage free sooner and save you thousands in interest over the life of your mortgage.