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Thursday, October 23, 2014

How Not To Spend Your Tax Refund

Posted by Tim Stobbs on April 24, 2014

*click* “Oh wow, that’s my account balance?!? I’m pushing almost $10K. I must have got my tax refund.”  That was me a few days ago on the computer.

I really do like that feeling of getting my money back from the government.  There is something nice about getting a bit of extra cash that you previously weren’t planning on.  In my case, I normally owe a small amount of tax each year so getting a refund over $4000 was unusual. Yet I had managed to put a lot of money in a spousal RRSP and thus got a extra big refund because of it.

So for about a few seconds I ideally wondered what I could spend the money on.  A nicer summer vacation could be fun or perhaps a break from winter later this year.  Or perhaps I could start that kitchen renovation that we keep talking about?  Yet in the end I did what I had already planned.  I moved every dime of the refund I got (plus a little extra) over to my TFSA and maxed out my contribution this year.

How did I managed to do that?  It’s called planning ahead.

The day I filed our taxes I knew I had a bit of time until my refund was put in, so I started thinking about what to do about that money then…before I ever had it.  That way I could go through every idea in my head and sleep on it before making a decision.

So yes I did consider spending my tax refund on other things like a vacation or kitchen reno, but ultimately I just loved the irony of using a tax refund to invest without paying any more tax on that money.  I can’t say everyone should do that since if you have lots of debt you might want to pay that off first.

In the end the only really bad way to spend your tax refund…is on an impulse buy.  After all what might seem like a good idea at the time could end up being a waste of money.  I think everyone has gone through buyer’s remorse at some time or another.  So right after you submit your taxes sit down and start dreaming.  Then after a few days of sleeping on the idea you will really know if it is a good one or not.

What did you do with your tax refund this year?  Or what do you plan to do?

 

Comments

10 Responses to “How Not To Spend Your Tax Refund”
  1. jon_snow says:

    With our 8k refund, bought some dividend paying stocks and a handful of REITS. Monthly passive income amount steadily rising – a beautiful thing to watch for an impending early retiree. ;)

  2. ernie says:

    I come out even most years.Last year i received an inheritance which i put into rrsps.I used only enough deductions on this years taxes to make my refund enough to max out my tax free account.I carried over the left over rrsp deductions to do the same next year.It is like doubling my investments

  3. Canuckguy says:

    I usually just get a small refund being in tax paying balance but this year I had to send the CRA almost $1100 due to a capital gain I made which unfortunately was made outside of a TFSA.

  4. deegee says:

    Gettng a tax refund means you overpaid your taxes during the previous year, so all you are doing is getting your own money back. I never want to get a refund and in my 28 years of filing personal income tax returns, I have very rarely gotten one.

    Since I ERed in late 2008, I make estimated tax payments only, so I have total control of how much I pay during the year. Why on earth would I ever want to intentionally overpay so I can get some money back the following year? About 9 years ago, while I was still working, I had to make an estimated tax payment anyway. By mistake I paid too much and ended up with a small refund. I did not feel good about it; instead I felt a little stupid for putting myself in a refund situation.

  5. Tim says:

    First a charitable donation and the balance will go straight back into an RRSP account and invested!

    Trigger further refunds next year. :0)

  6. Jacq says:

    Received a little over $13k back for 2013. Spent it on pretty much the same things as Jon. :-P In the taxable account though since my non-taxable contribution limits for 2014 were maxed already in January.

    It wasn’t a big deal to wait to get the money back since pretty much all of it came from money earned during a couple of months at the end of the year. I didn’t know I’d be working during that period so I didn’t file a T1213 request earlier in the year. Then there was the added complication of capital gains too since I have no prior year losses to use and I certainly didn’t know early in the year what my gains would be, although I can estimate dividends. But generally I try not to get a refund.

    It just gets complicated once you have non-sheltered investments (or work sporadically) and has stopped being a significant % of NW like it used to be, so I don’t worry about it. I’ll spend my energy and brain cells trying to optimise something that can earn a heck of a lot more than that.

  7. James Brown says:

    Zeroed out the line of credit, and put the balance of it into retirement savings.

  8. Amy says:

    Transfer whole tax refund cheque immediately to another bank account (the ones you use it just for saving, not daily use) and use it, only as for emergency fund. No excuse.

  9. Martin says:

    Hello,

    My rule for the big returns is always splurge on 10%. Yes the amount is not big but instead of beaing an all or nothing situation and feeling stuck I go for 10. This year I’m buying new weightlifting equipment and the rest is going to my TFSA. It’s good to be me.

  10. Geoff says:

    Paid for a Bahamas vacation we took. Yes I know the majority here save and invest, but life is also for the living so check me tommorow.

    (And yes, we do have investments, aggressively pay down our mortgage, and have about a year’s worth of expenses saved… we’ve also had a horrible winter and it was nice for just the wife and I to get away. Divorce is expensive too, so better to avoid it and life a little) ;)

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