3 Ways to Invest Your Tax Return

It’s tax season and, if you’re lucky, you’re getting a tax return. While it may be tempting to spend your tax refund right away, there are alternative ways to maximize this unexpected bonus and enhance your financial well-being.

Before spending your tax return in full, consider these three options for maximizing your tax return.

Contribute to Your Savings

Your tax refund can be a great way to give your savings a jumpstart. It's an opportunity to receive an influx of cash in addition to your regular income, so take advantage of it to make progress towards your goals.

In particular, this is a great opportunity to contribute to an RRSP or TFSA. By contributing to an RRSP, you not only reduce your taxable income but also potentially increase your tax refund for the next year through the RRSP deduction.

Opening a TFSA is a suitable option if you want to save for a short-term project such as home renovations or a big purchase. The investment income is sheltered from taxes, and you can withdraw what you need without paying taxes.

Still not sure which option is right for you? Learn more about the differences between TFSAs and RRSPs before making your decision.

Pay Off Debts

After adding to your savings, it might be a good idea to pay off any lingering debts you have. Debt can be a significant source of stress for anyone, and you can utilize your tax refund to reduce your debt.

Additionally, you can use your tax refund to make an annual principal payment to reduce major debts such as car loans or mortgages. However, paying off outstanding balances on higher-interest credit cards or lines of credit should be your priority.

If the interest rates are identical, it's better to start by paying off the smaller amount first. This will give you some momentum and make it easier to tackle the remainder of your debts. It will also enhance your credit rating!

Create an Emergency Fund

Throughout the year, unexpected events can have a significant impact on your finances. From having to replace a vehicle or repair an appliance, to experiencing a job loss or illness, these circumstances can lead to debt or the depletion of savings reserved for other goals.

By utilizing your tax refund, you can establish or add to an emergency fund if you already have one. Having an emergency fund can prepare you for unforeseen events and minimize financial stress during already difficult times. This fund should be reserved strictly for emergencies, ensuring that your investments remain untouched in such situations.