The dust has started to settle after the commotion of tax season. Now that you’ve submitted your return and CRA has processed it, you might be in the enviable position of getting a tax refund. You might have already earmarked that money as soon as you found out you were getting that “gift” from the government, but I have a few tips before you part with that cash in today’s video.

The first thing to consider is why you are receiving a tax refund. For the most part, if you’re employed and have taxes deducted from your paycheque each pay, your tax refund, or balance owing should be pretty minimal.

If you received a refund as a result of contributing to your RRSP, that extra income from your tax refund should be going right back into your RRSP. As I outlined in my recent video “Rethinking RRSP’s”, the amount you should be saving in your RRSP needs to incorporate the tax refund you’ll receive as a result. Otherwise, if you’re looking to save the same amount as you would have in a TFSA, and spending the tax refund as a bonus, you’ll be worse off come retirement. Here’s an example to show why this is, Say you’re paying a 40% tax rate. If you determined that you had 10,000 to save after-tax, you could put that in a TFSA or RRSP. If you spent that tax refund, you’d save the same amount in both accounts, and after 30 years earning an 8% return, you’d have just over $100,000. With the TFSA, that’s tax free. But with the RRSP, you still have to pay tax on those withdrawals (since you got a tax break when you contributed). Even if you drop down to the 20% tax rate in retirement, that $100,000 in the RRSP is still only worth $80,000, $20,000 less than in the TFSA. If you’re in the position with a maxed out RRSP, you should still save that refund either in the TFSA or a non-registered account.

There are some other things to consider using your tax refund towards before buying that big screen TV.

Top up your emergency fund. According to a survey by Manulife Financial, millennial homeowners report the lowest median amount of emergency funds. It’s really important to have some cash set aside for emergencies. What happens if your car breaks down, or a furnace or air conditioner repair is on the horizon, or your parents on the other side of the country get sick? Perhaps you lose your job, or you get sick and have to pay for medication, or have to take unpaid time off work. Lots of things can go wrong in life, so make sure you have cash set aside so that you can cover those without turning to your credit card.
Pay down debt. In 2010, average student debt for a bachelor degree was $26,300. For every dollar in disposable income, Canadians owe $1.67. Paying down debt is the equivalent of investing in a GIC with the same interest rate.
Save for long-term goals with the highest priority. Even if you didn’t receive your tax refund as a result of contributing to an RRSP, you can still put your tax refund towards savings. Put that extra cash towards your house down payment fund, your retirement, starting a new business.
Save for irregular expenses. Car maintenance, gifts, home repairs. These aren’t regular expenses that occur every month, at least hopefully! They can be easy to forget when budgeting, and can crop up unexpectedly. Don’t get caught off-guard and put some money towards savings so you’re prepared when the inevitable happens.

If you’ve got all your ducks in a row and have a healthy emergency fund, have paid off your debts, have already funded your goals for the year, and your budget won’t be thrown off by gifts you have to get for that wedding you were invited to this summer, then go ahead and splurge! Research shows that spending money on experiences provides more happiness than stuff, so go ahead and book that vacation!

Going forward, you might want to consider setting things up so that you don’t get a refund. Getting a refund from the government essentially means that you loaned them money throughout the year, interest free, and are now getting it back from them in April. If you’re consistently in the situation where you receive a tax refund, you can complete CRA form T1213. But make sure you’ll continue to get similar credits and deductions in the future because things like tuition credits run out, dependent credits stop, and employer pensions you’re no longer a part of don’t reduce your taxes. You don’t want to be caught in the situation where they owe money in April, but don’t have any cash available.

Use your tax refund wisely this year and you’ll be thankful you did.