Canada’s April 30th deadline for filing income taxes is just around the corner. So by now, you probably already know if you’ll be receiving a tax refund this year. Maybe you paid more tax on each paycheque than required, or maybe you decided to max out your RRSP contributions to help reduce your taxable income last year. Either way, isn’t it nice to know you’re going to receive a little “bonus” cheque from the Canada Revenue Agency?
Now, I bet you can think of plenty of ways to use that extra bit of cash… but have you considered using it to advance your personal financial goals? Here are three smart ways to use your tax refund.
Pay down debt. This, I’m sure, sounds like the least fun and exciting option, but in reality it can be one of the most effective ways to help you achieve your financial goals. As long as you have debt working against you, the longer it will take you to accumulate any real, substantial savings. I always recommend clearing out consumer debt first, because those interest rates are usually the highest. Once the debt is gone (and you are following a monthly budget to avoid more consumer debt), then you should start thinking more seriously about investments. That’s when interest will be working for you, not against you!
Reinvest into your RRSP. If you’re really into the idea of tax breaks, then this is the way to go. Maxing out your RRSP room, or at least putting a big dent in it, will probably put you in a good position for tax time the following year. Better yet, you’re likely to see your investment grow quickly with tax-free interest. If you look at your tax refund as money that you didn’t have before, so it’s something that you won’t miss, reinvesting into your RRSP is a great way to keep that money working for you toward your goals.
Contribute to a TFSA. Do you have an RRSP and a TFSA? If so, bravo! It sounds like you’re already making great efforts to invest for the future. One of the things I like best about having both types of investments is that you have two different pockets of money that you can use at different times and in different ways. Obviously, your RRSP is meant to be used in retirement (or for the first-time homebuyers plan) so it’s not something you should ever dip into if and when you need some extra cash. A TFSA, on the other hand, is a little more accessible in the short term. You could use TFSA funds for anything—like a home reno, dream vacation, down payment on a new car, etc. Don’t get me wrong, TFSAs are also great ways to save for longer term goals too, I just wanted to demonstrate the flexibility of this type of investment. I really like TFAs, and often suggest them for younger investors, for this reason.
So, there you have it! Three smart ways to use your tax refund. If you’re interested in any of these options and would like to discuss next steps, contact us or book a meeting. We’d be happy to help you get on track to achieving your personal financial goals.
Disclaimer: This blog post is for educational purposes only. Before making any investment decisions, I strongly encourage you to speak to a licensed professional to discuss your options.