Video: Five strategies for using your income tax refund

After you file your income tax return, you might receive a tax refund. This often happens if you have made a substantial RRSP contribution, claimed a tax credit, or if your income tax instalments were too high.

Here are five strategies for making use of this capital.

The first is to reinvest it in your RRSP. Not only will this money appreciate in a tax-sheltered environment, but it will also generate a refund in the following year, which you could again reinvest. In 25 or 30 years, this strategy could account for hundreds of thousands of extra dollars.

A second strategy would be to deposit the refund in another investment account. The TFSA, or tax-free savings account, allows any adult to invest a certain amount per year on a tax-sheltered basis. The annual limit for 2020 is $6,000. If you turned 18 before 2009, when the TFSA was created, your cumulative contribution limit will be $69,500 in 2020.

Third strategy: repay your high-interest debt, especially if it’s not deductible. The interest saved by doing so would be equivalent to a return on investment of the same amount.

Fourth strategy: increase your emergency fund, since everyone should have the equivalent of three months’ income in liquid investments. Thus, if your annual income is $100,000, you should have at least $25,000 in your emergency fund.

Finally, the fifth strategy could focus on the educational needs of your children or grandchildren. You can invest a lifetime total of $50,000 in an RESP, or registered education savings plan, to help finance their postsecondary education.

To tailor these strategies to your personal situation, contact your mutual fund representative or your financial security advisor.

 

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