Getting a bit of extra money is always a bonus, and it turns out the average tax return in Canada is around $1,600. In 2019 so far, the CRA reports the average tax return at $1,614. So if you get a refund, what should you do with it?
If you decide to invest it, what’s the best vehicle? A lot depends on your appetite for risk, your investment experience and your overall financial status. Here are some basic things to think about when it comes to some of the most common options: GIC, RRSP contribution, TFSA, playing the stock market or having a little fun.
Debt Reduction: Pay off Credit Cards
If you have high-interest credit cards with a balance owing it might be most prudent to pay those down. Reducing high-interest consumer debt makes it easier to pay down your debts overall, and frees up money in the future for other investments.
Playing it Safe: GICs and Savings Accounts
A guaranteed income certificate (GIC) is just that: guaranteed. For a modest investment you’ll get back your principal and a set return. You can choose from a cashable or non-redeemable GIC. The latter typically comes with a higher interest rate, since it’s locked in for a set term.
There’s also your tried-and-true savings account. It’s tough to lose when you simply stash the money away for a rainy day. Interest rates can vary from bank to bank, so check out your options. Some institutions will offer higher rates to new account holders.
Saving for Retirement: RRSPs or TFSAs
Strictly speaking, Tax-Free Savings Accounts are not just for your retirement. They are typically compared, however, to Registered Retirement Savings Plans. Any money you put into an RRSP isn’t taxable until you withdraw it at a later time. By contrast, you pay tax on the original TFSA contributions, but not on any income made on investments inside the fund.
You can have many different investment vehicles inside your RRSP or TFSA. That could include GICs and mutual funds. So a TFSA is exactly what the name implies: a way to make money off your investments without having to pay tax on your returns. RRSPs withdrawals are taxable, but there are a variety of programs like the Home Buyers Plan that allow you to defer the tax if your withdrawals are for specific purposes.
Weighing Risk/Return: Stocks and Mutual Funds
There’s some thrill in owning shares in a company, especially if you’re already a brand loyalist. Investing in stock is a high risk endeavor, but can also result in good returns. Experts differ about the approach you should take if you are investing this way for the first time.
Some say you should put money in your favorite companies; other recommend watching how some stocks trend over several weeks or months. Because the market does tend to go up and down, stocks are often regarded as a long-term investment.
Mutual funds are a managed group of securities with varying risk profiles. That means you’ve got a stake in several investment vehicles at once inside the fund. You can find a mutual fund that is aligned with your financial goals: savings, income, or growth. Be sure to read the fine print: mutual funds and similar products tend to charge fees.
If you’ve already thought about investing, you’re likely to do just that. Certainly, dropping $1,600 into a low-risk investment to save for a vacation or unexpected car repairs isn’t a bad choice. But sometimes, everyone wants to use the money to do something a little different. The key is balance.
If you are on solid financial footing, it may be just fine to take a workshop, plan a road trip or otherwise invest in yourself. If you still can’t choose, know you can split the difference: many investments start as low as $500, and you can still fulfill your lifelong dream to learn mime.
To find out options for investing $500 or your entire windfall, compare rates at Ratesupermarket.ca.