Personal Investor: Smart ways to spend your tax refund
Taxes are filed – now comes the refund.
According the Canada Revenue Agency, the average income tax refund last year was $1,645. For anyone who thinks it’s an amount not worthy of investing, here’s something to think about from someone who has almost always re-invested his tax refund.
$1,645 invested each year with a five-per-cent annual return becomes $82,437 in 25 years.
But the growth doesn’t end there. If you re-invest your refund in a registered retirement savings plan (RRSP), you can generate a refund from your refund, and a refund from that refund, and so on. All that money can grow tax free until you retire.
It’s hard to know how much you can save in income tax because RRSPs are fully taxed when withdrawn. If you are in a high tax bracket when you contribute, and in a low tax bracket when you withdraw, the savings are huge.
If you are in a low tax bracket, consider investing in a tax free savings account (TFSA). You can’t deduct the contribution from your income tax but gains on your investments are never taxed.
Whether it’s an RRSP or TFSA, you can invest your contribution in just about anything – stocks, bonds, mutual funds, exchange traded funds, and even options.
If you’re stuck for ideas on what to invest in, consider topping up holdings you already have, which have not yet reached their potential.