D. Smith: Make the best use of a tax refund

First, always pay down bad debt with high interest rates being charged to you.

Congratulations—you received a tax refund.

The good news is you now have money you did not have yesterday; and the reality of your tax refund is your own money is now being returned to you.

You loaned the government your hard earned money for the past 12 months—free of charge—and they are now giving it back to you after you filed your tax return.

What should you do with your tax refund in 2013?

Always pay down bad debt with high interest rates being charged to you.

Bad debt can be considered as any type of credit card debt charging you interest rates of example 9%, 18% or 28%.

Paying down your bad debt with a tax refund provides you with a guaranteed after tax rate of return that you are currently paying on high interest debt.

This is by far the No. 1 best choice—though it may not be your first choice because it is not a lot of fun. But you will thank yourself in the future.

Have an emergency fund. If your current emergency fund is a high interest credit card, find a better plan than that.

You should have several months of income set aside—or have the ability to borrow at a low interest rate—example being three to four per cent if and when an emergency occurs—and these happen regularly to most people.

Review your life insurance and mortgage insurance costs now.

If you have mortgage insurance covering your mortgage or line of credit. Talk to a life insurance broker to save money and provide an added layer of financial security for your family with life insurance.

A tax refund can help to cover the cost of premiums on a life insurance policy.

Providing for dependants, covering taxes on death, paying off debts, or equalizing an estate are all reasons for purchasing life insurance.

Contribute to your RRSP. If you have room to contribute to your registered retirement savings plan, this will provide additional tax savings for next year.

Next to paying down bad debt, setting aside money for retirement is your next best option.

If you have no debt or minimal debt, contribute to your TFSA.

This allows you to benefit from tax free investing. Many Canadian’s are receiving minimal interest on their TFSA—which results in very little value to the consumer.

Consider building other forms of equity with your tax refund. Real estate and private business ownership can increase our equity over our lifetime.

A tax refund can contribute to a larger pool of money to build other types of equity.

Contribute to an RESP.  If you love free money from the government, set aside money for the education of a child or grandchild with your tax refund.

These contributions will receive Canada Education Savings Grants (CESGs) from the government. RESP contributions are not tax deductible but will assist children and grandchildren in paying for post-secondary education and will attract the CESG maximums.

Give your money away to your intended (family) heirs now. Gifting your money now allows you to reduce the size of your estate at the time of your death, and reduces taxes and probate fees at that time.

The biggest advantage is seeing the gift being enjoyed now during your lifetime.

Do you deserve a treat? Then spend the money. When it comes to a tax refund, many people like this option the best.

Spending your tax refund may be suitable where you have no bad debt and your retirement savings are in good shape.