Financial Focus: What to do with your tax refund

By Medicine Hat News on June 2, 2018.

As a result of your RRSP contributions, interest expenses or various other tax deductions and credits, you may be expecting, or have recently received, an income tax refund from the Canada Revenue Agency (CRA). If you receive a tax refund, it may be a good opportunity to determine if you can use some or all of it to improve your financial well-being. The following will cover some strategies that may help you use your income tax refund wisely and assist you in meeting your financial goals.

It’s easy to be tempted to spend your refund — for example by taking a well-deserved vacation or doing a minor renovation to your home. In some cases, this is an appropriate use of the money, depending on your priorities in life. You might also consider saving all or a portion of your refund for your future financial security. The “compounding” effect helps even small savings grow significantly over the long term, helping you live the lifestyle you want.

A good first step in determining the best use for your refund is to review the recommendations in your financial plan. You can then review the areas needing improvement and prioritize what is most important to you. The receipt of an income tax refund can be a great catalyst for you to implement some of the strategies in your financial plan. Preparing your will or power of attorney, setting up your emergency fund or putting adequate disability or life insurance in place can be easily done with the average tax refund. Of course, saving the refund in an RRSP, RESP, TFSA or paying down debt are all financially wise saving strategies for the funds.

If you plan to pay down debt, consider paying down an outstanding non-deductible debt subject to a high interest rate. Non-deductible debt includes credit card debt, a personal use car loan, and a line of credit used for personal purposes or the mortgage on your home. As the interest on a loan used for personal purposes is not deductible for income tax purposes, you are paying the interest on the loan with after-tax dollars. The higher the interest rate on the loan or the higher your marginal tax rate, the more income you have to earn to pay the interest on this loan, so the more beneficial it is to pay down this debt.

A fundamental financial planning strategy is to have some money set aside for unexpected expenses or a job loss. In general, consider keeping approximately three to six months of living expenses within a liquid emergency fund. If you do not have an adequate emergency fund, you may want to direct some or all of your tax refund towards its creation. As they say, a penny saved is a penny earned.

This is not an exhaustive list but some things to think about when you receive your refund.

A. Craig Elder, CFP, FMA, CIM, FSCI is Branch Manager with RBC Wealth Management Dominion Securities Inc. in Medicine Hat. Source material provided by RBC Wealth Management Services. Advisors are insurance licensed under RBC Wealth Management Financial Services Inc., a subsidiary of RBC Dominion Securities and is part of the RBC Financial Group, member CIPF. For more information on this and other financial strategies, contact an Advisor @ (403) 504-2700.

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