Q: What should I do with my tax refund?
A: I'd love it if there was one simple and consistent answer to this question. It would save all of us the hassle of trying to figure out the smartest thing to do with our refunds whenever we get them. But, as with most personal finance questions, the answer is going to vary considerably depending on the state of our individual finances as well as our goals.
Here are some considerations:
Pay Down Debt
If you have high-interest debt, you'll want to do your best to get rid of it. Take all or part of your tax refund and pay it down or pay it off. I don't know anyone who's ever regretted paying off debt.
Save for a Rainy Day
If you don't have an emergency fund, then it's a good idea to prioritize creating one. Or if yours isn't as full as you'd like it to be, then consider using your tax refund to top it up. Emergency funds are incredibly important and are my go-to recommendation as they apply to everyone. As a general rule of thumb, it's smart to have 3-6 months' worth of expenses in an emergency fund. A high-interest Tax-Free Savings Account (TFSA) is a great place to keep your emergency fund.
Make a Contribution to a Retirement Savings Plan (RSP)
Sounds weird, right? Use your tax refund — possibly mostly generated by making RSP contributions — to fund more RSP contributions, which will then likely generate another tax refund for you next year. It's a continuous cycle of making RSP contributions to create tax refunds to fund more RSP contributions. I like it.
Set It Aside for Your Next Vacation
Making sure your upcoming summer (or, middle of winter “I'm tired of the snow and just want to sit on a beach already!") vacation already has an earmarked amount set aside for it — ideally in its own account — is a sure way to relieve financial stress when booking. If you keep the money in a designated "vacation" account, when you put your flight and accommodations on your credit card, you can just pay those expenses with the earmarked cash that came from your tax refund.
Fund Your Kids' RESP
If you have children and are contributing to a Registered Education Savings Plan (RESP) for them, you could use your tax refund to make top-up contributions if you've fallen behind. The Canada Education Savings Grant (CESG) money you receive is an added sweetener — a guaranteed 20% "rate of return" (i.e. free money) on up to $2,500 of contributions annually. That's potentially $500 per year to a total lifetime limit of $7,200 in free money.
If you're struggling to figure out how to prioritize from this list or other options, remember — there's probably not a perfect answer. But doing something with your tax refund is better than just spending it, and looking back, realizing there's nothing tangible to show for it.
If you have a question Joe can answer in a future article or a topic suggestion, please email it to: askanadvisor@tangerine.ca
This article is intended to provide general information only about RSPs, TFSAs and RESPs. If you need further information about your specific circumstances, you should speak to an investment advisor.
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