Topped up your RRSP contributions? Think twice before spending that tax refund

OTTAWA – You might be feeling pretty good about that contribution to the RRSP account and may be daydreaming a little about how you’re going to spend the tax refund.

But investment experts say people should think twice before blowing that cheque from the government on a new television or a quick weekend getaway.

“What you have to remember is that it’s not actually a windfall, it is money that you’ve paid in taxes that you’re getting back for funding your retirement,” said Larry Moser, divisional manager for BMO Investorline.

He said people need a strategy for the money, whether it is investing it or paying down debt, depending on financial circumstances.

For those with high-interest debt, such as credit card debt, Moser says that would top his list for uses of a tax refund.

When making an RRSP contribution, people aren’t avoiding tax on their contributions, they’re only delaying it. The advantage comes from the tax sheltered growth and it is likely people will be in a lower tax bracket in retirement when they withdraw the money than when they earned it.

“The idea is to grow your money in a tax-free environment for as long as possible,” Moser said.

However, advisers say people need to remember that they will pay tax on the money when it is withdrawn. That means $100 in an RRSP does not necessarily mean $100 in your pocket when you take the money out of the account in retirement.

Personal finance author Talbot Stevens says investors need to understand the difference between before-tax and after-tax dollars when it comes to their RRSP accounts.

He says if they don’t put the equivalent before-tax amount in their RRSP, they are investing less than they think.

“We need people to realize that if they are going to spend their RRSP refund, as almost everyone does, you’re putting in less than you thought,” said Stevens, author of the Smart Debt Coach.

Stevens recommends people invest their tax refund and more to help make up the difference, suggesting that Canadians need to top up their RRSP contributions by 25 per cent to 100 per cent.

A poll done for BMO found that 33 per cent of Canadians who expect to receive a tax refund after making an RRSP contribution will save or invest the money. Other top uses included paying down a mortgage (16 per cent), home renovations (14 per cent) and travel or leisure items (13 per cent).

Moser said a $2,000 tax refund might not seem like a lot of money in terms of your retirement, but if you reinvest it every year it will add up.

“Even something that doesn’t seem like a lot of money right now, it could end up being a lot of money in the future,” he said.

The BMO survey was conducted by Pollara with an online sample of Canadians between Feb. 22 and 24.

The polling industry’s professional body, the Marketing Research and Intelligence Association, says online surveys cannot be assigned a margin of error because they do not randomly sample the population.