3 shrewd ways to make your tax return refund work for you

September 5, 2014

Got some money back on your tax return? While it might be tempting to spend, there are better ways to make a refund work for you. Here are 3 shrewd ways that could pay off big.

3 shrewd ways to make your tax return refund work for you

If you get money back with your tax return, it’s not a gift from the heavens. A tax refund is the amount the government reimburses a taxpayer who has overpaid for various reasons.

A juicier tax return

To increase the amount of money you receive back from the provincial and federal governments, there are some things you can do before filing your return:

  • Make your maximum contributions to a registered retirement savings (RRSP) plan or other tax-free savings program.
  • Claim all your charitable donations.
  • Split your household income.
  • Take advantage of all the tax deductions for which you may be eligible: tuition, medical expenses, environment-improving renovations, the purchase of a fuel-efficient vehicle, public transit passes, a home office, the purchase of a first home, and more.

Make the most of your tax refund

You've worked hard to maximize all of your deductions, so now you have a nice refund to manage. It’s a good opportunity to review your finances and invest the extra money in the right place.

Q: So what does that mean?
A: You could potentially get richer without making much effort.

You're probably wondering how that could be possible.

1. Pay down debt

Do you have some debt in the form of outstanding credit card balances or a line of credit?

  • With interest rates that range between 15 and 29.9 percent, the best thing you can do is use your tax refund to pay off as much debt as you can.
  • Start by paying the balances of the cards with the highest interest rates.

2. Get ahead on your mortgage

Do you have a mortgage? Use your tax return to make a lump sum payment.

  • This installment is allocated directly to the principal of your mortgage.
  • This incredibly simple strategy can also help you significantly reduce the interest you owe.
  • Talk to an advisor at your financial institution to find out the maximum annual amount that you can use to bring down the capital.

3. Reinvest in your RRSP

Investing your tax refund in your registered retirement savings plan (RRSP) or tax-free savings account (TFSA) is a great way to prepare for your future.

  • Contribute to your RRSP to get a larger tax refund next year.
  • Put money into a TFSA if you are saving for a special project (e.g., travel, renovations, purchase of a vehicle, etc.) because the interest earned, and therefore any withdrawals, are tax-free. Otherwise, you can use the TFSA to build a safety net for unexpected expenses.

A well-designed financial plan

Is there anything better than a nice tax refund? Yes, there is: a financial plan that is designed to make it grow. Make the most of your return by talking to an advisor at your bank or financial institution to learn how to pay less tax and get a bigger refund. Or just get some advice on how to use the money wisely. Either way, you’re the winner!

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