Six Uses For Your Tax Refund

As of April 30, the deadline for filing your taxes, the Canada Revenue Agency (CRA) had already processed 17-million tax returns. And for the 66% of those filers who got money back, the average refund was $1,570.  If you are on the receiving end, you want to be sure to put your refund to work for you. Consider the following six strategies for spinning your refund into gold:

  1. Put it into a Tax-Free Savings Account (TFSA).  Withdrawals from a TSFA are tax-free — meaning investment returns can accumulate inside your TFSA without generating taxes — making a TFSA tomorrow’s tax-free pension. So, do maximize this opportunity.
  2. Put it into an RRSP.  It’s the next best thing to a TFSA, if you have contribution room. It will not only increase your tax refund next year, but it will also add to your tax sheltered savings and, in some cases, increase social benefits such as the Child Tax Credit. Given that the median annual RRSP contribution is about $2,800, Canadians can increase total sheltered retirement savings by 56% just by contributing the average refund.
  3. Pay down non-deductible debt. Debt that is not business- or investment-related — and, therefore, tax deductible — such as credit card debt, home mortgages and lines of credit erode your potential for savings. You can’t effectively optimize saving room if you are paying down debt, particularly debt bearing high interest rates.
  4. Shore up risk management.  Every family should be able to go six months without earning income, in case of job loss, illness or caregiving responsibilities.  How have you managed your risk?  Do you have an emergency fund or insurance? Your tax refund can help.
  5. Reduce your withholding taxes at source.  Next year, reduce that tax refund. Instead of loaning money to the government interest-free, it could be funding your future.  You are obligated to pay only the correct amount of taxes — no more.  So, review the amount of taxes withheld from your pay cheque. Reducing the deduction at source allows you, rather than the government, to maximize the time value of money.
  6. See a professional advisor. If you expect a major life event — such as a marriage or a divorce, a birth or a death — professional help can be a good use for at least some of that refund.

It’s Your Money.  Your Life. Remember, Canadians under the age of 54 will now wait two additional years, until age 67, to receive their $6,500 annually in Old Age Security.  By taking control of your tax refund and investing it tax-efficiently, you are taking a giant step toward financial freedom:  $1,570 invested each year for 11 years (age 54 to 65) amounts to slightly more than $17,000 — which means you can retire at 65 after all!

Evelyn Jacks is president of Knowledge Bureau and author of Essential Tax Facts 2012 and co-author of Financial Recovery in a Fragile World with Al Emid and Robert Ironside.  Follow her on twitter @evelynjacks.

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