What To Do With Your Tax Return...

So tax season is pretty much over now and people are starting to get some money back from the government (if you have been reading this blog and have put some money into RRSPs and donations and education anyway). So the question is, what are the best options to do with your tax return?

Option 1: Get a lower tax return next year

Remember that when you receive a return from the government it means that the government has overtaxed you in the previous year. They have hung onto an extra chunk of each pay, with you getting no benefit. So next year, get less taxes taken off each paycheque, so your cash flow improves.

Option 2: Reinvest in RRSPs (or an RRSP loan)

The next best option is to re-invest in RRSPs any money that you get back from the government. So if you get back $1000, immediately contribute that into your RRSP for next year. If you do your taxes (or estimate them) and find out that you will be getting $1000 back, take out an RRSP loan from your bank for $1000 and pay them this back with your return. The advantage to doing this is that you will get an extra $350 back on your return (depending on what your marginal rate is) so you have extra money regardless. I haven't tried this yet, but "fatcatc" has this planned for the future. Don't just pick a random amount though: make sure that you only borrow what your previous potential tax return was, so that this loan can be repaid immediately, rather than linger over the year.

Option 3: Pay off bills

If you have credit card debt, that is another option for your tax return (although still less preferable than options 1 and 2).

Option 4: Build an emergency fund/planned spending

What can also be done is to build an emergency fund with your return or planned spending. What planned spending means is if you know that you spend $500 for Christmas each year, rather than putting it on your credit card this upcoming year, pocket aside $500 from your return so that money is available to you at this time.

Option 5: Upgrades on your house

I rate this a little higher than my last option because this is something that is building value. Although I always think of "Christmas Vacation" where Chevy Chase is counting on his Christmas bonus to put in a pool. You can't really plan "in 2011 I will spend my return on a new deck and in 2012 I will spend my return on hardwood floors", etc. in case things don't happen as expected.

Option 6: Random spending

Some people decide to buy a big screen television or new furniture with their tax return...they treat it like a lottery winning each year. If all of your bills are paid, your TFSA is maxed and your RRSPs are maxed out, then I say "go ahead", but for the other 99.999% of Canadians (at least that I know), there are better fiscal ways for this.

As far as what I did with my tax return, most of mine went to bill payments, although about 10% of my return went to emergency fund contributions and 10% went to "random spending". "frugala" is planning to take her money and "throw it on the pile", which is her way of saying that she will keep it in her emergency fund.