What can I do with my income-tax refund?

Why you’re getting a refund 

Remember that you’re getting a refund because you paid more in income tax during the year than you owe. That means it’s not a gift—it’s your own money that you’re getting back, and if you’d had that money all along, you might have used it for your financial needs and goals. That’s why it makes sense to use it where it’s likely to give your finances some relief or, better yet, help you make progress toward your goals. Depending on your situation and the amount of your refund, you have several great options.

1 Pay off debt

Paying off or paying down debt, especially the high-interest kind, can be one of the best ways to help you reach your financial goals. If your credit cards charge nearly 20% interest on debt, for example, very, very few investments can offer a return anywhere close to that. If you want to spend money in a way that benefits your financial future, paying off any outstanding debt first is a great place to start.

While waiting for your tax refund, take an accounting of your outstanding debt, and consider paying it off based on what incurs the highest interest most quickly. Credit cards are often at the top of the list, with lines of credit, student loans, auto loans, and mortgages being considerations for many. 

2 Create an emergency fund

Being financially ready for an emergency can be a big stress relief. Whether it's job loss, major repairs, or health issues, we’re all likely to experience an unexpected event that’s going to cost something. If you’re proactively setting aside money, these occurrences don’t have to be a financial burden.

Your tax refund can be a great start to your emergency fund or a top-up. You should consider keeping the money somewhere you can get to it quickly and won’t have to pay a fee to access it. You’ll also want to keep it somewhere that accrues interest, such as a high-interest savings account.

3 Save for retirement or other financial goals

One of the best ways to invest your tax refund is to put the money aside for your retirement. The more money you’re able to put away now, the more flexibility you’ll have when you're planning your retirement. Between now and retirement, you may have other goals you’re saving up for as well. Here are different routes you can take, depending on your goals and timeline.

Contribute to your RRSP

Investing your tax refund in a Registered Retirement Savings Plan (RRSP) can be a great way to build your retirement savings while setting yourself up for next tax season. 

• Any money you contribute to an RRSP will be deducted from your taxes for the next year, so you’ll have a better chance at a refund. 
• Any money you invest with an RRSP will be allowed to grow without being taxed on that growth—you’ll only be taxed on the money you withdraw once you’re retired.

Put it in a TFSA

Another way to save for your retirement or another financial goal is to add your tax refund to a tax-free savings account (TFSA). While an RRSP is designed specifically for retirement, the flexibility of a TFSA means that you can also use it for other financial needs and goals.

• You can take money out of a TFSA whenever you want without incurring taxes, while withdrawals from an RRSP are usually subject to withholding tax and are included in your taxable income. This means you can use your TFSA for your other short- or long-term goals as well as for your retirement.
• Your money grows tax free—in addition to no taxes on withdrawals, the money in a TFSA doesn't get taxed on any interest, capital gains, and dividends it earns. 
• A TFSA can be part of a tax-efficient retirement strategy, since withdrawals won’t affect your taxable income, government benefits, or tax credits. This can make it a valuable complement to your RRSP.
• There’s no upper age limit on a TFSA, unlike an RRSP, so you can keep adding money as long as you want, making it a great part of your retirement strategy.

Regardless of your goals, investing money—especially money that falls outside your day-to-day budget like a tax refund—is a great way to set you up for the retirement you want and to achieve your financial goals.

Now’s the time to think about what to do with your tax refund

Everyone has different financial goals, so it’s important to consider your individual circumstances. But paying off debt, building an emergency fund, and saving for retirement or another financial goal are all good things to consider when putting your tax refund to good use. If you're able, dividing up your tax return and contributing to a variety of your goals could be very worthwhile.

If, like many Canadians, you’re looking forward to a refund on money you’ve overpaid, it might be a good idea to connect with a financial advisor to learn how you can make the most of it.