7 clever things to do with your tax refund

December 15, 2014

If you’re anticipating a tax refund this year then that’s great news! Here are 7 clever suggestions of what to do with your unexpected cash windfall.

7 clever things to do with your tax refund

Who wouldn't be happy to hear that he or she is getting a tax refund? And when it’s money you didn't expect to be receiving, it’s extra good news. After the excitement wears off, the question becomes: what to do with your tax refund? There are some responsible things to do with the money that you definitely won’t regret down the road.

1. Open a Tax-Free Savings Account (TFSA)

Use your tax refund to make contributions towards a TFSA. While there's no immediate benefit derived as you put money into a TFSA, the plus comes because withdrawals from this account are non-taxable.

  • This includes any increase in the account balance accrued through investments. So as this TFSA grows, you will still not be required to pay taxes on withdrawals you make from it at any time.
  • The difference between an RRSP and TFSA is the latter encourages you to save money and not stockpile it for retirement.

2. Add money to your Registered Retirement Savings Plan (RRSP)

Planning for the future is always a good thing.

  • For the 2016 taxation year, March 1,  2017 is the last day you can contribute to an RRSP.
  • The maximum RRSP contribution you can make is 18% of your 2016 earned income to a maximum of $25,370.

3. Put money toward your mortgage

The more money you put toward your mortgage, the sooner it will be paid off.

4. Put it toward a Registered Education Savings Plan (RESP)

If you have kids, this is a no-brainer. You’ll be happy you did this – and so will your kids.

  • In contrast to RRSP contributions, any contributions made towards an RESP are not tax deductible.
  • What's more, as the earnings accumulate the tax is deferred. That means when the earnings are finally paid out they are taxed in your child's hands at his or her lower rate.

5. Pay off any debt you have

There’s nothing worse than the feeling of owing someone money. Why not use this tax refund money to clear any debts, and your conscience?

6. Establish an emergency reserve with the money

After all, it’s probably not money you expected to have in the first place, so it’s not like you’re going to miss it.

  • Think of this emergency fund as a safety net in case something happens and you need more money than you have coming in.
  • For example, if you lose your job, want to go visit a sick relative in a different city or simply need a little extra cash one month to cover your expenses.

7. Do something crazy that you've always dreamed of

Yes, you can be responsible and make your mother proud by choosing one of the options above.

  • Or, you can decide that you need some excitement in your life and do something adventurous that you haven’t been able to justify spending money on in the past.

What have you always dreamed of doing?

  • Scuba diving in Barbados?
  • Going to the opera in Australia?
  • Eating sushi in Japan?

Whatever it is you've always wanted to do, now might just be your ideal opportunity to surprise yourself and go for it.

So what do you do with your tax refund? The answer is up to you. But at least now you have some solid suggestions.

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