10 Ideas To Put Your Tax Refunds Into Good Use in 2015
1) Build Up Emergency Savings
We could anticipate regular expenses (i.e.: mortgage, car lease, groceries), but there are many others that could arise unexpectedly (i.e.: Car is broken down, furnace of the house suddenly not working). There are also unexpected events which could stop you from generating income. For example, sickness, injury or simply got layoff from work. I usually would recommend to build up savings that could finance for at least 6 months of your regular expenses. Since the savings are prepared to be use anytime, you should consider investments that are very easy to liquidate while having low volatility. For instance, redeemable GIC, short term income funds, money market funds, regular savings account.
2) Save For Your Child’s Education
Contribute into your child’s RESP account. Depending on your situation, your deposit could attract the Canada Education Savings Grants. Generally speaking, an annual deposit of $2500 could attract $500 in government grants. (Note: The lifetime maximum grants is $7200, there are different terms and conditions that have to be met in order to qualify for the CESG)
3) Grow Your Investments Tax-Free
The recent budget has changed the annual contribution room of the Tax Free Savings Account (TFSA) from $5500 to $10000. Any gains, dividends, or interest arise from investing within the TFSA are tax free. Also, there are no tax implication even when you withdraw from the account. If you have never made any contribution to this account at all, you could contribute up to $41000 this year. (Given you are eligible to start the TFSA back in 2009)
4) Invest For Your Retirement
The Registered Retirement Savings Plan (RRSP) remains to be a critical tool to accumulate your retirement savings. When you contribute into your RRSP account, the contribution are tax-deductible. In other words, it could be used to reduce your taxable income, which leads to even more tax refund. This is especially beneficial to the high income earners since they fall into a higher tax brackets.
5) Take Advantages Of The Disability Savings Benefits From The Government
The Registered Disability Savings Plans (RDSP) would provide matching grants range from 100% to 300%. I cannot elaborate more than that on why you should put your money into the account. However, this plan is for long term savings, so prepare you would not need to access to this money for a long time. (Note: The matching grants depends on your family net income and amount of your contribution.)
6) Pay Down Mortgage
Many mortgages have a prepayment privilege, which means this allows you to make extra mortgage payment without any penalty charges. There is a limit to how much extra one could pay down in a given year, it usually ranges from 15% to 20% of the loan. Since every financial institution has their own terms in regards to prepayment, make sure you confirm with your lenders before you take any action.
7) Pay Down RRSP loan
I found getting the RRSP loan is like a cycle. Some people do not have enough liquid savings to put aside for their RRSP, so they borrow a loan to contribute into their RRSP. As a result, they could receive a larger tax refund. With that tax refund, they could now use it to pay down the RRSP loan. I personally do not recommend solely relying on loans to build up your RRSP savings, because most people will not access their RRSP for a long time, but they will need to make the loan payment now. If the loan amount is built up overtime, this might create a cash flow problems in the long run.
8) Pay Off High Interest Loan
A typical example of high interest loan could be credit cards. Many people mistakenly thought by just paying the minimum amount stated on the statement would be good enough. This is not true, as in many cases, the minimum required is not even enough to cover the interest. There are many credit cards that charges extremely high interest rate (i.e.: Some charges near 30% per year). Use the tax refund to pay it down as much as possible. If you have too many credit card problems, a debt consolidation plan could be a needed solution.
9) Double Your Charitable Donation
A person is wealthy not simply because the networth he/she has, but the willingness to share with others in needed. As you probably heard on the news recently, there is a severe earthquake that destroys many families in Nepal. Many children are suffering and urgently need your help. the Canadian government has announced a Nepal Earthquake Relief Fund, if you make a contribution to a registered Canadian charities for this cause between April 25th and May 25th, 2015, the government will providing a dollar-for-dollar matching. I personally show my support through World Vision, you could find more details on their website (http://www.worldvision.ca/). By the way, your donation receipt can be used to reduce your income tax.
10) Spend It On Things That Create Meaningful Value In The Long Run
Last but not least, investing in yourself and your loved ones is always the best investment choices you could make. How about pursue a higher education or training? What about a short trip to spend quality time with your family? How about a shoulder massage device for your spouse? Anyway, the above are just some ideas, you would know better how to create meaningful value for your family.
- Disclaimer: Once again, the above 10 tips are for general information only, and do not intend to provide specific financial advice.
- Image courtesy Stuart Miles/FreeDigitialphotosn.net