What To Do With Your Tax Refund?

Are you getting a tax refund this year? Our first inclination is typically that a tax refund is a bonus and we rush out to use it for something that gives us emotional gratification. Spending the bonus can make us feel good but there may be some smarter things to do with the money.

If you are interested in using the refund for building wealth, consider some of these options

  1. Invest into RRSPs

    Investing your refund back into RRSPs is just smart financial planning. It may not be as much fun as going out to buy that new toy, but investing money is a good habit and there may be no better time than right now.

    Investing now has advantages over waiting until January or February. It is forces you to save instead of having to find the funds from other sources in the future.

    If you are investing in RRSPs early, you may want to apply for a reduction of taxes at source.

  2. Pay off non-deductible debt

    Paying off debt might be one of the best investments you can make particularly if that debt is non-deductible. For example, say you have a loan you are paying 7.5% interest. While you might perceive that to be a reasonable interest rate, think again. On an after tax basis, assuming you are in a 36% marginal tax rate, that interest is really costing you 11.7%. Unfortunately, when you earn a dollar, you must pay tax and therefore, you will only have 64 cents to go towards the interest.

    The key to the debt reduction strategy is not to go back into debt. Far too often, I see people that commit to using their tax refund to pay off debts like credit cards or personal loans only to go back into debt. If this sounds like you, you might be better off investing your refund into RRSPs as a method of forced savings.

  3. Invest in a Tax Free Savings Account (TFSA)

Tax Free Savings Accounts were introduced to Canadians in 2009.  Everything about the TFSA is awesome. It’s TAX FREE when you put money in, TAX FREE when you take it out, TAX FREE when the money grows, TAX FREE if you die.  There are limits as to how much you can put into the TFSA because they are such awesome accounts.

As great as the TFSA is, there is still merit on putting money money into the RRSP (TFSA vs RRSP) or paying down debt (TFSA vs Debt).

Getting a refund may not the best thing

Money TreeWhile most of us would rather get a refund than have to pay any amount of tax at tax time, you may not be making the most efficient use of your money.

In fact, getting a refund really means you have given the government an interest free loan for 15 months. You would have been better off investing that money or using it for wealth building instead of lending it to the government tax-free. For some, tax refunds are a means of forced savings but if you are disciplined at financial management, you may want to apply for a reduction of taxes at source. This will force your employer to withhold less taxes off your paycheck so that this money is in your hands instead of the CCRA’s hands.

To apply to reduce tax deductions at source, you can fill out a form called the T1213 which can be found on the CCRA website at .

Simple not easy

Building wealth is really simple. Spend less than you earn and be sure to force yourself to ‘spend’ your money on assets that build wealth as opposed to assets that have no wealth. Unfortunately, while this is really simple, it is not easy to do because we get more emotional satisfaction out of using the money for things that either depreciate in value or have no financial value.

As you get that refund this year, think twice about what you want to do with that money. If you have already maximized the RRSP and have no debts, congratulations – spend away.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

4 Responses to What To Do With Your Tax Refund?

  1. Sorry life’s too short not to enjoy the refund! Way too much focus or preoccupation with everyone lately on save, save, save. I have had a fair number of people pass away way too soon. Made me realize this is not dress rehearsal, it’s once around the block. Sure be smart but saving your refund if it’s not necessary goes along way to too!

  2. Jim,

    The “Getting a refund may not the best thing” is usually ignored by typical financial advisors; too many promote the vacation paid for by the refund.

    Even today with the low interest rates, it is still a better choice to use the T1213 because the spending budget is better defined and the RRSP contributions are kinda hidden in the payroll deduction.

    If someone decides to use the T1213 without the payroll deduction, the surprise at the end of the year will definitely be a measurable lesson.

    Also since some employers contribute a percentage of the payroll amount deposited in an RRSP, the T1213 is the perfect companion to automatic contributions from payroll.

    Why is it that I’ve learned about these things after I stopped working?

  3. One more option. Invest in yourself. Use the money to get certification in your industry or to take classes at a community college. Use your refund to make yourself more marketable.

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