Use any cash you receive wisely is the golden rule.
If you are lucky enough to get a tax refund from the government, before you spend any money you receive, remember that it is no gift or free money. It is your hard earned money come back to you. So use it wisely. Here are a few strategies to consider.
Pay off debt
If you are carrying large credit card bills at doubledigit interest rates, wipe the slate clean. If you have no credit card debt, pay down your mortgage. A $1,000 prepayment on a $100,000 mortgage amortized over 25 years at 5% will save you over $2,300 in interest.
Make a lump sum contribution to your Retirement Savings Plan
The sooner it starts compounding the better. A $1,000 RRSP contribution earning an annual average return of 5.7% over 25 years quadruples to $4,000. And your RRSP contribution could result in a tax refund next year.
Pay back your RRSP Loan
If you took out a loan to make an RRSP contribution, use your refund to pay that loan back. You’ll save on interest charges and free up money that would otherwise go to your monthly loan payment.
Contribute to a Registered Education Savings Plan.
The federal government provides a 20% grant on up to $2,500 contributed each year ($500). That’s free money. Contribute to a Tax Free Savings Account.
Invest the refund in a TFSA – Tax Free Savings Account
You can invest $5,000 per year into a TFSA . You don’t get a tax deduction but any income earned in the account grows tax free.