If you’re expecting a tax refund this year, you may be thinking about finally purchasing that fancy new barbecue. Free money, right? Well, not really. The income tax refund is money the government owes you—money you overpaid throughout the tax year.
So before spending on a big ticket item, why not use your refund in a way that generates longer-lasting benefits? Below are a few ideas.
- Pay off your credit card balances. The saving can be significant. For example, if you’re carrying a $3,000 balance at 19%, it’s costing you almost $600 a year.
- Contribute to your RRSP. If you have contribution room, depositing your refund into your Registered Retirement Savings Plan (RRSP) will generate a tax deduction for the current year.
- Contribute to an RESP. Contributions of up to $2,500 a year to a Registered Education Savings Plan (RESP) can generate an additional 20% to the plan from the Canada Education Savings Grant (CESG).
- Invest the amount in a TFSA. There’s no tax deduction for contributing to a Tax-Free Savings Account (TFSA), but both earnings and withdrawals are tax-free. The contribution limit for 2019 is $6,000. If you have not fully taken advantage of TFSAs to date and turned 18 in 2009 or earlier, the cumulative contribution room available is $63,500 as of 2019.
Talk to your advisor to determine suitable investment options for your refund. But if you still prefer a new barbecue to accompany those warm summer days, consider enjoying the best of both worlds. Use part of your refund to buy something special for yourself or your family and use the rest to improve your financial future. Your advisor can help you decide which approach may give you the most bang for your refund buck.