A tax refund can feel like free money from the government. While it can be fun to spend your refund cheque on a vacation or new home entertainment centre, there are other ways to leverage those funds to pay down debt, save for retirement, and maximize your tax deduction for 2013. How can you make the most of your tax return? Read our tips on 7 smart ways to spend it below:
Pay Down Debt
Get rid of your bad debt by using your tax refund to pay it down. Choose debt with a high interest rate first, or debt where interest is not deductible for tax purposes such as credit card debt, or your mortgage.
Contribute to your RRSP
Worried about having enough money to fund your retirement? If so, you may want to use your refund to contribute to your RRSP. As long as you have room to invest your tax refund, your contribution will provide additional savings when you claim that deduction in the future.
Contribute to your TFSA
Your tax-free savings account provides the ability to shelter from tax the growth and income on various investments. As a young person just beginning their career, it may make sense to contribute your refund to your tax-free savings account instead of your RRSP – allowing you to maximize your RRSP investment at a later date where you could incur more tax savings because of your investment. Learn more about investing in TFSAs and RRSPs.
Help the Kids
Give your refund to your children to help with debts, or buying their first home. Helping your kids now reduces the size of your estate and helps to save on taxes and probate fees when you eventually pass on.
Fix up your Home
Using your tax refund to improve the value of your home through renovations or improvements is a great way to tackle that big project while protecting your investment. Thanks to the principle residence exemption, the added value and its growth will be protected from tax.
Buy Life Insurance
Do you have life insurance? The majority of Canadians are underinsured, and therefore risk leaving their family or dependents in a financial crisis should they suddenly pass on. Why not spend some of your refund to secure your family’s future?
Donate to Charity
Do a good deed, and save more tax at the same time by donating your refund to a charity that’s close to your heart. In fact, a new enhanced donation tax credit introduced in this year’s budget adds an additional 25% in tax savings federally on your first $1,000 donation provided you have not donated before, or at least have not made a donation since 2007.
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