7 Smart Ways to Spend your Tax Refund

This is a re-post but highly relevant.  Enjoy!

As most people filed their tax return before the income tax deadline, it’s now a matter of waiting for that juicy tax return.  Most consider tax refunds to be “free money” that was unaccounted for.  And it’s true, you can do whatever you want with the money.  However, in my opinion, tax returns should be used wisely as it’s basically money that you overpaid to the government during the year.

Although they may seem like common sense, here are my some ideas on how to use that tax refund:

1. Pay Down High Interest Debt

If there is credit card or other consumer related debt on your personal balance sheet, then all “unplanned” income should pour into high interest debt.   Paying down a 19% rate credit card balance, is the same as returning 19% after tax (guaranteed) on the market.  Good luck finding a GIC with that kind of yield.

2. Pay Down Your Mortgage

I must admit that when people ask on what to do with their excess cash flow, besides the obvious of high interest consumer debt, paying down the mortgage is probably what I suggest most.  There are a couple reasons for this.  First, paying down the mortgage provides a guaranteed after tax return, second, it’s dead easy to do.  Even though investing in the markets may outperform paying down the mortgage balance (if rates are low), not everyone has the time or patience to learn how to invest.

3. Contribute to your RRSP

I remember a while back when I read Preet’s RRSP Book that it had many examples of RRSP vs non-reg portfolios.  To my surprise, the non-registered portfolios can very close in after tax returns.  The conclusion was that RRSP’s are superior only if the tax refund is reinvested or used to pay down debt.   What does that mean for you?  If you contributed to an RRSP, at the very least, take the portion of your tax refund attributed to your RRSP contribution and reinvest it/pay down debt.

4. Contribute to your TFSA

Depending on your situation, it may be more efficient to contribute to your TFSA.  Certain cases like employees with a generous defined benefit pension plan where retirement income will be fairly high, the tax free withdrawals from the TFSA during retirement is welcomed.  In addition, TFSA withdrawals do not count as income, thus will not be used in senior benefit clawback calculations.

5. Contribute to an RESP

Here’s something a little different.  If you have children, if you contribute $2500 per year to an RESP, you can receive the max government matching of $500.  The account can grow tax free and withdrawals are taxed in the hands of the student when they start higher education.

6. Build your Emergency Fund

Having a large emergency fund may not be required for every situation, but I believe that having some liquidity is extremely important in every household.  If you haven’t started a cash emergency fund, one way to fund it is with the tax refund.

7. Invest in Yourself

Instead of investing the tax refund in the market, consider investing the money in yourself (or your business).  Most of the money accumulated in your life will be due to your career or your business.  Take courses, improve your credentials, even buy some books.  Do something that adds value to your company, whether you own it or not, it will bring benefits.

Final Thoughts

This year, I ended up with taxes owning with my wife expecting to receive a refund.  Going down the list, we’ll most likely use the refund to contribute to our RRSPs.  Back to you, how will you be using your tax refund?

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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4 years ago

Good list. We always invest it into either resp tfsa or rrsp.

4 years ago

I told them to keep mine and roll it over to 2017 tax… I’ll take some dividends out of my corp tax free and spend them on some fun stuff :)

8 years ago

Whenever I get a tax refund, I always make it a point to invest it as I do not have any debt currently. However for those that do have debt, the best thing they could do with their tax refunds is using all of it to pay off their debts. Using the money to build an emergency fund is also a good idea as you never know when you might end up needing some cash.

8 years ago

We used it to pay off our car in its entirety! Such a feeling of triumph!

Canadian Budget Binder
8 years ago

Lots of great ways to spend that tax return, thanks for sharing. I received my whopping $216 cheque and that went right on the mortgage. Like you said not everyone has the patience to learn how to invest. I do but I’m not risking putting it into high gear just to pretend I know what I’m doing when I’m still learning.Sometimes it’s better to go with what you know rather than what you think you know. Like everything else it takes time, education, experience and working your way into I suppose. That’s the direction I may just take but for now, being mortgage free next month is going to make it all worth it! Cheers and thanks for sharing this.

8 years ago

Regarding people’s ideas about whether getting a refund is good or not, when my wife and I first came back from overseas, are were just scraping by, I asked my employer to adjust my paycheque to reflect the fact that I was supporting two dependants; no interest-free loan from me!

By the time our second child was born, things were better financially, so I didn’t tell my employer about him. This way, there is a little redundancy build in, making it less likely that we’re going to need to pay taxes as a result of investment income.

For me, the thrill of getting a refund now outweighs the math of letting the gov’t play with my money for free for a few months. This year, it was almost like getting an extra month’s pay.

8 years ago

Common sense, yet a good reminder nonetheless.

10 years ago

For the first time since I’m in Canada (5 yrs), and the first time I get money back, my refund goes to savings, TFSA basically. And that’s just the beginning of my new me, just separated with no money and more debt than I’d like, but starting to save money (1100 since April, yuhu! not much but it’s something). It was about time!! Webs like this one are my inspiration to switch my relationship with money. thanks!

10 years ago

Ed I appreciate your premise regarding huge tax refunds. That said you also have to remember that you are also taxed on the interest you make unless of course it’s in a T.F.S.A. Which only allows $5,000.00 per year. So perhaps lending the government a loan at 0% isn’t as bad as it seems considering how interest on non T.F.S.A. is taxed. Personally I prefer a huge tax refund because then I can call the tax man Santa in March… etc. LOL!

10 years ago

I disagree with your assessment regarding the Real Estate housing market tanking. And I’m not a dummy either. At the very most Canadian housing values may level off or slow down but investing in a home is still one of the surest ways to personal prosperity. At times it may feel like it’s the “turtle” route, however the U.S. can appreciate how their “hare” stategies affected their economy. If you’re in the market to purchase a home I would consider doing so while the interests rates are low and perhaps opting for a open variable might be something to consider as well. You mention putting your refund into a down payment account. Therefore I assume you have maxed your R.R.S.P. contribution room. If not please consider that you can borrow from your R.R.S.P. to purchase your home. This is an excellent way to increase your downpayment too. And if you know that your parents have named you in their will you may consider asking them to give you that inheritance early so that you can put it towards your purchase. I did that and my return was over 100 %.