Splurge or invest — how should you spend your tax refund?
Receiving a tax refund feels like free money, and it’s tempting to spend it on luxuries. We know you deserve a spa weekend or a trip with the guys to watch a Seattle Seahawks game. But there are good reasons for spending your tax refund on something that will benefit you in the long term. That extra cash could be put into a savings vehicle that will positively affect next year’s taxes, netting you a potentially bigger refund.
This year, the average refund for Canadians was about $2,100, according to the Canada Revenue Agency. If you have debt, such as an outstanding credit card bill, pay this down first. (This is especially prudent given today’s high interest rates.) However, if your budget is under control, consider investing the refund into a Registered Retirement Savings Plan (RRSP). Topping up your RRSP will help reduce your taxable income on next year’s return, which may translate into another tax refund that is potentially larger than this year’s.
There is another advantage to investing in an RRSP. It might reduce your net family income enough to obtain higher refundable tax credits through the Canada Child Benefit. This tax-free monthly payment is made to eligible families to help fund the cost of raising children under age 18.
Many young adults and young families are saving up to buy a house. If you fit into either of these categories, consider investing your tax refund into the new Tax-Free First Home Savings Account (FHSA). This gives first-time home buyers the opportunity to save $40,000 tax free. It works similar to an RRSP, in that contributions are tax deductible. And, when you withdraw the funds to purchase a home, the money won’t be taxed.
This is similar to another popular savings vehicle, the Tax Free Savings Account (TFSA), which allows an annual contribution of up to $6,500. Contributions aren’t tax deductible like RRSPs, but earned income within a TFSA is tax free, even when withdrawn. (If you withdraw funds from your RRSP it becomes taxable income.)
A registered education savings plan (RESP) is another great place to park this year’s tax refund. RESPs are terrific savings vehicles for families with young kids as they generate a matching 20 per cent government grant on contributions up to $2,500 per year. For lower income families, the RESP grant is even higher.
Alternatively, you can sock your refund away into a household emergency fund to cover unexpected expenses like car repairs, job loss or health problems. For young families and individuals, aim to have three months’ worth of living expenses saved. Optimal is six months’ worth of living expenses.
Last, but certainly not least, you might consider portioning out some of the tax refund to a charity or two. The COVID-19 pandemic increased demand on charities while dramatically reducing revenues, and they are still struggling. A charity receipt also lowers your taxable income.
Your North Peace Savings & Credit Union Advisor will help you navigate the variety of options available for you to invest your tax refund in a way that will help you reduce future tax debt while building the family nest egg. It won’t mean that you will have to forego a spa weekend or the big game. Start saving about $10 a week, and you’ll be having fun before you know it.
Christina Clarance, Investment Specialist Fort St. John is a community that Christina and her family are proud to call home. Having lived in Fort St. John for 9 years, raising her children here, and having her immediate family and friends nearby, she has developed strong and steadfast roots to the region. Christina joined the credit union system in 2019 and felt an immediate connection with the values and support she experienced within the credit union.…read more