What Should You Do With Your Income Tax Refund?
Whether you plan to save, spend, or mix the two, there are smart ways to make the most of your tax refund. Tax season might not be anyone’s favorite time—after all, paperwork is not exactly thrilling—but for many Canadians, it comes with the bonus of getting some of their hard-earned money back.
Before letting that refund slip away on impulse purchases or a spontaneous getaway, consider these smarter ways to make it work harder for you and towards your financial goals:
1. Pay Down Debt
When you get your tax refund, review any debts you owe and focus on paying off the ones with the highest interest rates first—particularly credit cards, which often charge 20% interest. Other types include lines of credit, student loans, auto loans and mortgages.
Paying off high-interest debt is a guaranteed return—saving you money each month and drawing you closer to financial freedom.
2. Build or Boost Your Emergency Fund
Life is full of surprises—job changes, becoming ill or unable to work due to an accident. Having three to six months’ worth of living expenses saved removes stress and helps you avoid going into debt. If you do not already have one, park your refund in:
- A high-interest savings account
- An easily accessible but interest‑earning place
It is about peace of mind—and financial resilience.
3. Save for Retirement or Future Goals
Thinking long-term? A refund can jump-start your future savings:
- RRSP: Any money you contribute to your RRSP will be deducted from your taxes for the next year, meaning you will have a better chance at a refund. Earnings will continue to grow tax‑deferred until withdrawal.
- TFSA: Contributions are not tax‑deductible, but growth and withdrawals are tax‑free—and you can invest well into your seventies and beyond.
Regardless of where you decide to keep your money for retirement. Investing your refund towards retirement is a beneficial way to reach long‑term financial success.
Here is a winning strategy on what to do with your next tax return:
- Allocate some toward debt repayment.
- Deposit a portion into your emergency fund.
- Save the rest in your RRSP, TFSA, or another investment account.
- Treat yourself with a small purchase.
Everyone’s financial goals are unique, so it is essential to take your personal situation into account. Dividing your refund strengthens multiple pillars of your financial life—debt control, security, growth—and still allows some enjoyment.