Are you expecting a nice, big tax refund for the 2015 tax year? If you are, you are probably thinking about how you can spend this free money. You shouldn’t think of a tax refund as free money, because it is really just money that the government owes you because you overpaid on taxes. This is money you could’ve been using to save, pay off debts, or invest throughout the year. Because of this, we highly recommend you use your refund for one of the following reasons.
Pay off Debts
The first thing you should do with your tax refund is use it to pay off any outstanding credit card debt. A standard credit card has an interest rate of 19.99%, so for example, if you carry a balance of $5,000 for a year, you are paying almost $1,000 in interest. If you pay off your balance with your tax refund, you will be saving more than you could if you invested it.
Contribute to your retirement savings
If you have contribution room left in your Registered Retirement Savings Plan (RRSP), you can add that amount to it in order to generate a higher tax deduction for the current year’s tax return. Of course, the main goal of an RRSP investment is to save towards your retirement, but the immediate tax boon is icing on the cake.
Save for your child’s education
If you’ve been neglecting saving for your children’s post-secondary education, now is as good a time as any to start. By contributing to a Registered Education Savings Plan (RESP), you can also take advantage of the Canada Education Savings Grant (CESG) which adds an additional 20% towards your plan.
Why not continue the trend of saving on taxes by using your tax refund to invest in a Tax-Free Savings Account (TFSA)? There are no tax deductions for contributing to a TFSA, so earnings and withdrawals from the account are tax-free. Much like RRSPs, the TFSA has a contribution limit, so it is best to make sure you don’t over-contribute, as any excess TFSA amount is taxable.
Of course, it’s OK to indulge if that shiny new 4K HD TV is too hard to pass up. In this case, you can consider enjoying the best of both worlds by buying a new toy and using the rest to solidify your financial future. For help determining how to best use your substantial tax refund, contact a financial advisor at The Beacon Group of Assante Financial Management, Ltd.