A little windfall wisdom can help that unexpected money go a long way.
Whether you receive a tax refund, a lottery win, an inheritance or simply a raise, consider some or all of these strategies (always include the “spend and enjoy” option), in order of priority:
(1) The most profitable move is to pay down your most expensive (non-deductible) debt – typically outstanding credit card balances.
Paying down those balances is the same as earning you 20 to 30 per cent a year on your money – and that’s a tax-free return. Nowhere else can you earn such a guaranteed, risk-free return. Even earning 10 per cent by paying off a less expensive debt is an excellent return these days.
(2) If you are eligible, consider contributing to your (or a spousal) RRSP. By deducting the contribution, you immediately “earn” your marginal tax rate – again, typically 20 to 30 per cent.
The money in your plan can grow tax-free. Yes, you will pay tax when you withdraw the money, but the longer you leave it in the plan – and especially if you are in a lower tax bracket when the money comes out – the greater the benefit.
(3) Put money into tax-favoured instruments like the Tax-Free Savings Account (TFSA) and Registered Education Savings Plan (RESP) to take advantage of the tax-sheltered growth.
(4) Invest in non-registered instruments – for example, Canadian stocks/mutual funds that pay tax-favoured dividends, real estate – which, if they go up in value, allow you to compound that capital gain tax-free until you sell the investment.
(5) After you have taken care of some or all of the preceding steps, spend and enjoy perhaps 10 to 15 per cent of the money.
If you receive a large tax refund, find out why – and if applicable complete the T1213 Request to Reduce Tax Deductions at Source (Google that name to get a copy).
That way you get to claim those refund-producing deductions during the year (and so reduce your tax immediately) rather than waiting until after you file your return.
– Copyright 2018 Mike Grenby. Mike Grenby is a columnist and independent personal financial advisor: [email protected]
