7 ways to stash (not spend) your cash.
Have you received (or are you expecting to receive) a tax refund this year? Even though a refund is really just the amount you overpaid in taxes during the year, it can feel like bonus money in your pocket — and the spending possibilities are seemingly endless and tantalizing.
Don’t indulge your fiscal fantasies quite yet ― first check out these seven sensible (but satisfying!) ways to maximize your return1:
- Downsize your credit card debt: According to BMO’s 2015 Credit Card Report, 46 per cent of Canadians are carrying credit card debt and 30 per cent do not pay their bill every month. By using your refund to pay down your credit card debt, not only will you lower your current balance, you’ll also reduce the amount of interest you’ll pay on your remaining balance — and that will put more money in your pocket down the road.
Related: 5 tips to make a dent in your credit card debt
- Spend some, save more: If you’re dying to buy something new with the money, a good compromise is to spend a portion and put the rest into savings, whether it’s a regular savings account, a Guaranteed Investment Certificate (GIC), a Tax-Free Savings Account (TFSA), or your Registered Retirement Savings Plan (RRSP) or Registered Education Savings Plan (RESP). You won’t be the only one stashing your cash: A 2015 BMO Nesbitt Burns®* annual tax study showed that 25 per cent of Canadians (and 33 per cent of millennials specifically) plan to use their refund to save and/or invest.
Fact: Did you know 55 percent of Canadians have a TFSA? Get more stats and helpful tips from our TFSA Infographic.
- Contribute to your RRSP: An RRSP (also sometimes referred to as an RSP) is one of the most effective retirement saving and investing tools available to most Canadians. Since your money is sheltered and doesn’t get taxed until you withdraw it, it can grow even faster. And by the time you’re ready to withdraw in your retirement years, your tax rate will likely be lower, so you may still come out further ahead. Another benefit is that RRSP contributions are tax-deductible, which means they lower your annual taxable income. To find out your RRSP deduction limit, look at your latest notice of assessment or check with the Canada Revenue Agency.
Quiz: Take the quiz! How savvy are you when it comes to RRSPs?
- Bank on education for you or your kids: If you have student loans to repay, consider using your tax return to pay them down. Always start by paying off the loan with the highest interest rate first. If you received federal or provincial student loans, the interest amount on loans may be tax-deductible1, and you’ll also benefit by positively impacting your credit history and credit score if you pay them off quickly.
If you have children, you can also use some of your refund to contribute to an RESP. By 2021, a four-year degree is likely to cost more than $100,000 — making an RESP one of the best investments you can make in your child’s future, because they enable you to maximize your education savings with a tax-sheltered investment that will let your money grow faster.
Related: 6 savvy ways to help your kids pay for university
- Invest in your home: You can do this in a couple of ways. If you’re thinking of buying a new home, save up for your down payment (you may even be eligible for a first-time home buyers’ tax credit). Or, consider investing in renovations, whether it’s updating your kitchen countertops or giving your bathroom a total refresh. You wouldn’t be alone — according to a 2015 BMO report, 30 per cent of Canadian homeowners made a major renovation to increase the future value of their home.
Tip: You may also want to make an additional mortgage payment, if possible. Check out these five strategies for paying your mortgage faster.
- Donate it: Have a cause you’re passionate about? Give some or all of your refund to charity and, as an added bonus, you’ll be able to claim your charitable tax credits when you file your income tax return next year. CanadaHelps®† can help you find a charity and make a donation.
- Open or contribute to a TFSA: A TFSA is a great savings tool for both short- and long-term goals. It’s a flexible savings plan that lets Canadians who are 18 and older2 save and invest tax-free3, with competitive interest rates. Anything you contribute to a TFSA, as well as any income earned in the account (such as investment income and capital gains), is generally tax-free, even when it’s withdrawn3. The annual TFSA limit for 2016 is $5,500, so it’s a great time to put some of your tax refund money toward a TFSA.
®* Registered trademark of BMO Nesbitt Burns, Inc.
®† Registered trademark of CanadaHelps.
1 For informational purposes only. Be sure to consult a tax professional for tax advice.
2 For some provinces and the territories, you must be age 19, the age of majority, to open a TFSA.
3 Within contribution limits. Be sure to consult a tax professional for TFSA tax advice.