Receiving a refund means you’ve paid more tax than required throughout the year. If you do find yourself with a refund, here are six ideas to consider when deciding what to do with those funds.
1. Splurge (strategically)
Spending tends to rank low on most “what to do with your refund” lists, but it doesn’t have to be off the table entirely. If your refund is relatively small, consider treating yourself to something meaningful, perhaps a dinner out, a weekend getaway, or something you’ve been putting off.
Even if your refund is larger, allocating a portion of it for enjoyment can be a reasonable choice, provided it fits within your broader financial plan.
2. Contribute to your RRSP
Using your refund to contribute to your Registered Retirement Savings Plan (RRSP) can help grow your long‑term retirement savings.
You may have unused RRSP contribution room carried forward from previous years if you didn’t contribute up to your limit. Applying your refund to an RRSP contribution can help you take advantage of that available room and move closer to your retirement goals.
RRSP contributions are tax‑deductible and can reduce your taxable income for the year in which the deduction is claimed. The funds then grow on a tax‑deferred basis until withdrawal.
Depending on your situation, contributing to a spousal RRSP may also be worth considering. This strategy can help couples split retirement income more evenly in the future and potentially reduce their overall tax burden.
3. Contribute to your TFSA
Another option is to place your refund into a Tax‑Free Savings Account (TFSA), especially if you’re saving toward a short‑ or medium‑term goal.
TFSA contributions are not tax‑deductible, but any investment growth and withdrawals are completely tax‑free. Your refund can be invested inside a TFSA in a range of income‑generating or growth‑oriented investments.
TFSA savings can be used for major purchases such as a home, travel, or lifestyle goals, and withdrawals do not impact your taxable income. This also makes TFSAs an effective tool for retirement planning, particularly when used alongside an RRSP to diversify how your future income is taxed.
4. Invest through a taxable (non-registered) account
While the tax advantages of an RRSP or a TFSA are very tempting, investing in a taxable brokerage account also has its advantages. Capital gains are taxed at a favorable rate, so it can make sense to hold investments that are likely to generate sizable capital gains in these accounts while holding income generating investments in an RRSP or TFSA.
Dividends collected on stocks in a taxable brokerage account are also taxed preferentially as opposed to some other income sources. This is because the company has already paid tax on these dividends, and the government does not tax this income again.
Another thing to keep in mind is that funds in a taxable account like an RRSP can be more readily accessible over time than funds held in a tax-sheltered account since they are not subject to the same rules.
5. Pay down debt
If you have outstanding debt such as high interest credit card payments, a personal loan or a mortgage you can consider putting some or all your tax refund towards reducing this debt. You can eliminate or at least reduce the overall amount of the payments on this debt, saving the compounded interest cost over time.
In the case of a mortgage, if the refund is sizable, you could consider making a substantial payment to reduce or eliminate this debt entirely.
6. Build or boost an emergency fund
Your refund money can be used to start or add to an existing emergency fund. This is money set aside in a liquid, low‑risk account to cover unexpected expenses such as job loss, medical costs, or major home or vehicle repairs.
A common guideline is to aim for three to six months of essential expenses. This typically includes housing costs, food, utilities, insurance, transportation, and other necessities required to maintain your standard of living.
Having an emergency fund can help you avoid relying on debt when the unexpected occurs and provides valuable peace of mind.
Review your withholding tax
While not something you would do with the funds from a tax refund, this is a good time to review your withholding tax for the current year to see if it best reflects your situation. Has your income level changed? If so, are you having enough withheld?
Withholding tax refers to the amount of income tax your employer withholds from your paycheck and typically does not consider various deductions normally claimed, such as RRSP contributions, which reduce your taxes payable. If you find yourself getting a sizable refund each year you might consider reducing your withholding tax, so you receive more money with each paycheck.
The takeaway… prioritize what’s important to you
Getting a hefty refund can be a form of forced saving, but you are not receiving any interest on this money. You could be putting it to better use during the year by investing it. However, it really depends on your current situation and your needs.
Contact your Rothenberg Wealth advisor to discuss the best way to put your tax refund to use and to do a review of your withholding tax to ensure that it is optimal for your situation.
