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How Should I Use my Tax Refund to Pay Down Debt?

Canadians seem to be looking for ways to solve their money problems. In fact, Google announced last month that the phrase “pay off debt” reached an all-time high in Canada for number of searches. As we search for strategies to tackle our debt, a number of Canadians may be receiving an opportunity very shortly –  in the form of an anticipated tax refund.

Your tax refund can play a vital role in a debt repayment strategy. Before deciding which strategy is best for you, ask yourself  the following questions.

Will an increase in interest rates make my debt unmanageable?

If you answered yes to this question, using your tax refund to focus on decreasing your debt now is likely your best option. Although recent interest rates have dipped slightly, we cannot expect these low rates will last forever. Rather than viewing low interest rates as a reason to accumulate more debt, view them as an opportunity to tackle your debt before rates go up again. How comfortable are you with the amount of debt that you carry? Are you maxed out? If an interest rate increase could spell financial trouble for you, now is a good time to get your debt in check before this happens.

Another option: consider using your tax refund to pay down your mortgage, especially if you have a variable rate mortgage. As Ottawa mortgage broker Jean LaMarche suggests, taking advantage of your pre-payment ability is a great way to speed up paying off your mortgage and work towards debt relief.

Do you need to concentrate on retirement savings?

If you answered yes to this question and retirement savings is your top priority, use your tax refund to make an RRSP contribution.  While many Canadians tend to think that debt repayment and retirement savings can’t be combined, it is possible to save for retirement and pay down your debts. In fact, this year’s tax refund, deposited in your RRSP, will likely result in another tax refund next year. (Just be sure that you are contributing enough to your 2015 RRSP to accomplish this.) Use next year’s tax refund to tackle any debts you have at that time.

There a number of solid strategies for using your tax refund for debt relief. Before employing any strategy though, it’s a good idea to ask yourself a few fundamental questions. The answers can help you in your search for how best to “pay off debt”.

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