What to do with your Tax Refund if you're Due for One this Year
This year’s tax season was undoubtedly more complicated than ever, with COVID-19 government financial support programs muddying the waters. Be mindful that if you took advantage of those programs, you may owe money to the Canada Revenue Agency this year instead of being due a refund.
But if you are in line for a refund, one thing hasn’t changed: The need to be smart and strategic about what you do with it. And it’s important to recognize that the amount you receive will help determine your options.
There are many ways to put the money to work for you. If you employ a Certified Financial Planner professional or a Qualified Associate Financial Planner professional, they can help determine your best move based on a holistic view of your life situation, considering factors such as your income, age, levels of debt and the interest rate on that debt, among other factors.
“This past year has shown us that having our finances in order is more important than ever before,” says Jackie Porter, a CFP professional in Toronto.
“Whether you are adding to your existing savings or creating an emergency fund, this is a great time to use money you didn’t see coming to enhance your nest egg and fortify your safety net.”
Pay down high interest debt first
If you have balances owing on high-interest credit cards or lines of credit, you’ll want to pay them down first. You’ll be hard-pressed to save money when you have outstanding debts that aren’t being paid and the interest on what you owe makes up a big chunk of any minimum payments you make on your credit cards. Paying down this debt will also help you feel more in control of your finances.
According to Gillian Lee, CFP professional in Yellowknife: “If you’re carrying credit card balances, those should be a priority, since any investment gains will never be able to be offset by what you’re paying in interest on credit card debt.”
Making your money work for you
You could use the money to open a Tax-Free Savings Account (TFSA) or boost your contributions to an existing one, and invest the funds in high-interest yielding vehicles. And if you’re in good financial shape, the extra money could also serve as a nice lump-sum payment on the good debt people carry, like a mortgage on a property.
Porter and Lee offer more details and other options:
Immediately contribute to your Registered Retirement Savings Plan (RRSP): A smart and relatively painless use of your tax refund is to immediately put it into your RRSP, ensuring via the CRA website that you don’t exceed your 2021 contribution limit. You’ll thank yourself when early 2022 comes around and you’re not scrambling to put money into your RRSP as the March 1st contribution deadline looms.
Tackle your mortgage: Mortgage debt usually the single biggest debt we have. If your regular budget is intact and your tax refund serves as extra income, use it to pay down a portion of your mortgage.
Park it: If a big purchase is necessary and imminent—you need a new furnace, say—consider parking your money somewhere safely outside of your chequing account where it can earn some interest, like a TFSA or high-interest savings account, until the work can be done.
Splurge on yourself or your home: We’ve all had a stressful year, so this suggestion isn’t as frivolous as it might have been in previous years. The mental health benefits of treating yourself to something special, whether it’s a fancy coffeemaker or a backyard hot tub, could be worth it. Just make sure you’re not contributing substantially to your household debt, and pay off as much outstanding debt as possible first before considering this option. Otherwise, you’ll feel guilty, and that negates the mental health benefits.
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N/A (N/A) What to do with your Tax Refund if you're Due for One this Year. FP CANADA.
https://www.financialplanningforcanadians.ca/articles/what-to-do-with-your-tax-refund-if-youre-due-for-one-this-year