Tax return choices-spend or invest?

Many Canadians look forward to an annual tax refund from the Canada Revenue Agency (CRA). It's a mini-windfall-and it's tempting to spend the money on something frivolous.

But there are other uses for your refund. When you use the money you receive wisely, it can pay big dividends over time. Here are a few suggestions for making the most of your refund.

Invest in an RRSP. Use your tax refund to get an early start on your annual Registered Retirement Savings Plan (RRSP) contribution. The sooner you get money into your RRSP, the sooner you take advantage of tax-deferred growth.

Make up for missed RRSP contributions. You're allowed to make up for missed contributions going back to 1991. Using your refund will increase your pool of tax-sheltered assets, potentially boost retirement wealth and create a larger tax deduction this year or in future years. 

Pay down or eliminate high-interest debt. Use your refund to pay down credit card balances, personal loans or other expensive debt. You'll reduce interest costs.

Pay down your RRSP loan. If you borrowed money to make an RRSP contribution, pay down the loan as soon as your refund arrives.

Pay down the mortgage. Every dollar you put toward your mortgage principal is a dollar on which you won't pay interest for the next 5, 10 or even 25 years. 

Contribute to an RESP. Put money into a Registered Education Savings Plan (RESP) for your children or grandchildren. An RESP is an excellent tax-deferred vehicle to save for post-secondary education. 

Spend a bit on yourself. It won't hurt to spend a little of your refund on yourself. After all, you have to have some fun in your financial life. But try to limit it to 10% to 20%.

Now here's the bad news. You don't really want a refund. That money you get back from the CRA every year is like an interest-free loan to the government. By paying more in taxes throughout the year than you should, you've let Ottawa use your money. Plus, you loose out on potential investment returns until your overpaid taxes are returned.

Stephen Bronn, Financial Advisor Edward Jones Welland