How to Spend (or Save!) Your Tax Refund for Maximum Happiness

Hundreds – or thousands! – of dollars is about to hit the bank accounts of tax-filers everywhere over the next two months. That’s right, it’s tax return season – and it’s time to make sure that you spend (or save) your tax refund for maximum happiness.

Pre-S: Still haven’t filed? Check out Simpletax, the tool I use + love to file my taxes.

I know, taxes and happiness don’t usually go hand in hand, right? But they totally can, especially when you’ve got some fresh cash to play with in your account. Thanks, taxes!

The tricky thing is, there isn’t one guaranteed way to make sure that money will make everyone happy. (And even if there was, you know the internet would find a way to argue about it anyways. You know we would.)

Your tax return plan for maximum happiness might look similar to mine, or it might be wildly different. Luckily, there are four big strategies that can up your happiness quotient this tax season, based entirely on the things that matter most to you and your money right now.

And yes, these things can totally change from year to year. As you’ll soon see, they definitely have for me, and will continue to in the future!

The “Duh”: Save it for retirement

In case you’re not super-well versed on how tax-deferred accounts work (that’s the RRSP in Canada, or the 401k and the Traditional IRA in the States), there is actually a reason every personal finance article ever says that the only “real” way to handle your tax return is to toss it back into your retirement savings account.

Related: The Millennial’s Guide to the RRSP

It’s because for most of us, a big huge chunk of our annual returns comes ℅ our contributions to tax-deferred savings accounts.

Basically, at their core, these accounts are a way to not pay tax now, and pay the taxes later when we’re done earning money.

When you contribute today, the government gives you back the taxes you paid on that money. Since you’ll have to pay taxes on the money when you take it out, you only really get the full benefit of the account if you toss those current-day taxes right back in to let them compound for the 35 years you probably have until you retire.

So if “doing money by the book” is your jam, you should get plenty of happiness out of sending your money right back where it belongs, in an Official Sense. Hit up that RRSP, 401k or Traditional IRA and watch your retirement savings grow, my friend.

The “Awww”: Send some to charity

This is by no means necessary, but if you’re suddenly flush with tax-return cash, one of the ways you can put it to good use is to send a bit of it to causes you care about.

Personally speaking, this became a lot easier for me when I sat down to define, in very clear terms, which causes that actually included. For a long time, I felt like I didn’t have a charity “thing.” I’d hop on any fundraising bandwagon, donate to just about anything that caught my eye, but nothing ever really stuck.

Until dogs.

These days, I know exactly which causes I will get involved in, from offering my time, to my cupcakes, to (some of) my tax return dollars. That kind of clarity has been hugely helpful in terms of making giving a consistent part of my budget, and an inconsistent delight when extra cash comes my way.

If you know there’s a cause that holds a special place in your heart? Sharing the tax-season love is a good way to spend that return, and earn yourself a major happiness boost in the process.

The “Yes!”: Accelerate your progress towards a goal

If I’m being perfectly honest – and why wouldn’t I, after all that I’ve admitted about doing wrong with my emergency fund, my car insurance and my credit cards – I haven’t deposited a single cent of my tax refund into my RRSP.

And yes, I got the bulk of my tax returns for the past few years thanks to my RRSP contributions.

For the past two years, my tax return has been 100% dedicated to helping me top up and accelerate my house downpayment savings account, which was a huge help as I tried to save $16,000 in just over a year. (Lol wut.)

If you have an aggressive savings goal, consider this a free pass to send your tax return directly to your goal’s dedicated savings account.

Related: The Case for Having Multiple Savings Accounts

If anyone calls you out on not doing the back-into-your-tax-deferred-accounts thing with it, here’s your response.

“I’m giving myself a bit of wiggle room so that I can hit my goal, on my timeline, without even thinking about raiding my retirement savings to help me get there. Because that would be way worse.

If they’re enough of a nerd to be scolding you about how you handle your retirement accounts, they’ll totally concede, because withdrawing from a tax-deferred account comes with a tax bill you would not believe.

The “Treat Yo’self”: Spend a portion of it, guilt-free

Even before I had done the work to outline what my goals were, or when I wanted to achieve them by, I was pretty good with handling my tax return. I’d usually put about 90% of it back into some kind of savings account, even if I didn’t have much direction for it.

Want to get direction with your savings goals, no matter what they are? Grab your copy of the Bankroll Your Goals worksheet ASAP.

But notice how I said 90%, not 100%?

Yeah. Let’s talk about that other 10%.

When I first started handling my own taxes, I was rocking a decidedly new-grad salary, and with that, I had oodles and oodles of tuition tax credits to claim. Could I have saved them for higher-earning years and gotten more tax back?

Probably, yeah. I’m no tax expert.

Did I claim as many as I could, and get literal thousands of dollars back when I filed my taxes?

Oh heck yeah I did.

My tax return that first year ended up being more than I took home in a month by a sizeable margin. I was pretty chill about it considering, but even 10% of that amount of money seemed like the height of luxury.

So after I had filed away 90% of my tax-season windfall, I spent the rest of that money like it was going out of style.

And I would encourage anyone to do the same.

If you’re saving the bulk of your tax return, and you’re living well within your means regardless of your salary, and you think a few hundred dollars could finally get you that insert-thing-you’ve-wanted-forever-here? Go get it. Or do it, or see it, or eat it, or whatever your thing you want to spend money on is.

I don’t even think I have to explain to you how that’ll score you a happiness boost, right?

So let’s recap: If you’re looking for a way to handle your tax return that will give you a big happiness boost, you’ve got a huge range of options, and some of them will be a better fit for you than others. You could play it by the book, give some of it away, use it to top up your goals, or spend a chunk of it guilt-free.

And those are only four of them! I’d love to hear how else you guys are considering using your refund this year, or which uses have been particularly happiness-inducing in the past!

PS. To get that return in the first place, you need to file your taxes. If you’re in Canada, I seriously can’t say enough good things about Simpletax, which is how I’ve filed for the past four years.

Desirae is on a mission to demystify and un-boring financial info for millennials, so that we can all save more money, spend on stuff that matters to us, and still have a latte or two along the way. Money is literally why we can have nice things, and Desirae is committed to helping make sure you know just enough to make the right calls for you. (She’s also committed to her expensive dog, her side hustle, and her retirement fund.)

26 Comments on “How to Spend (or Save!) Your Tax Refund for Maximum Happiness”

  1. Emily

    YES. So much all of this. I used a bit of my return to buy furniture for my outdoor balcony (I pay for that space every month in my mortgage, but never used it…), but put most of my return into my Roth IRA to cap out for the year!

    1. Desirae

      AMAZING! Emily, seriously, if you’re capping out your Roth IRA, you SO deserve that patio furniture! Sitting outside when it’s nice out is the best, and you’re totally right – you’re paying for that space anyways!

    1. Desirae

      Look at you with your tax efficiency! Penny, on behalf of the personal finance community, I want to congratulate you on not giving the government an interest free loan.

      Lololololololol jk I miss getting giant refunds, mine is like $100 this year because of my side hustle. So like yes, didn’t give them an interest free loan! Boo, didn’t get that loan back in a lump sum.

    1. Desirae

      That’s awesome Jennifer! And as someone who’s staring down home ownership in the next year, I can entirely understand the renovations angle, lol. I feel like my constant struggle is going to be not updating everything at once, depending on the place we get!

  2. Samantha

    Save that $16000 Des! You can do it! :]

    I have a whooping $2k left in debt because unfortunately once I paid most of it off, I totally have started slacking in the home stretch, which is bad! So my return will go towards that and hopefully I’ll be done in the next month or two.

    Definitely by July, cause then I have to start paying for health insurance and it looks expensive. xx

    1. Desirae

      Ooooof, health insurance scares the pants off of me, for real. I’ve heard such bananas stories about how much it can cost, so kudos to you on the debt repayment!

      And also, YOUR DEBT IS SO MUCH LOWER THAN IT WAS! While I totally get that slacking happens, etc, I still am over here doing backflips at how much you’ve already paid off. Is it weird to say I’m proud of you? And happy for you?! Because I totally am, you’re amazing.

  3. Gary @ Super Saving Tips

    Those are all great moves for your tax return. In the “absolutely boring” column, I actually account for my refund in my budget. It gets allocated along with the rest of my income for savings and expenses. It doesn’t particularly induce much happiness this way, but it keeps my budget humming along in the face of recent unexpected expenses including dental work, electrical repairs, and a dead laptop.

  4. Caitlin

    Great job!

    I’m putting it in the emergency / Go to Hell fund. Glamorous, no. It’s good insurance for the unknown.

    But…there’s also a chance some of it will go towards a day trip in the near future. You can’t always live for the future. You’ve got to live now!

    1. Desirae

      Yesssssssss emergency funds are bae. Money to protect future me when life happens and I need it? Like, who would not be on board with that?!

      (And for the record, omg take the day trip! Hahaha it even sounds like such a reasonable indulgence – like, you’re not about to raid it to go stay in a five-star hotel in Paris or anything. I mean, unless you are and that’s a day trip for you? I might have to up my day trip game if it is.)

  5. Stephanie

    There is one year I spent all my refund as my old computer broke down. The refund covered the cost of a new one. It avoided saving and waiting for months or charging it to my credit card and paying interests. There is also one year I used it to pay for my rent. I was unemployed and had exhausted all my savings. I don’t regret doing that!
    Afterwards, I would split it 3-way: 1/3 for my RRSP, 1/3 for my emergency fund, 1/3 for me.
    My emergency fund is now fully funded, so this year, it is probably going to be 2/3 into RRSP, 1/3 for me.

    1. Desirae

      That’s so awesome Stephanie! And I think that using it for things you need that you’d otherwise have to put on a credit card is an amazing fifth option: The “Avoid a Bonkers Interest Rate”! Seriously, it sounds like those were both really great moves, and kudos on putting so much of it back into your RRSP!

    1. Desirae

      Do ittttt! (And omg high fives for retirement accounts! After this year, that’s my plan for mine too, once this whole housing thing settles down as my top priority, lol.)

  6. Finance For Geek

    Great list Des!
    Planning on increasing our emergency fund as well, but still wanting to make some lump-sum retirement accounts contributions to catch up for our earlier not-so-good savings years 🙂

    1. Desirae

      Thank you so much! And yayayay emergency funds! As for retirement, it’s funny, I feel like I’m taking the opposite approach: since I don’t have kids right now, I’m saving a little bit extra for the years when daycare eats my entire budget and I need to scale back a bit, lol

  7. Michelle

    What a great plan! 2016 will be the first year that I was working (mostly) full time, and I’ll be using up all of my federal and provincial tax credits, so I have a nice refund coming my way! I’m very excited, and I think the 10/90 plan for fun vs. saving is a good idea – I’m going to be socking away the extra into a savings account for a house.

    Any chance you’d be able to do a post in the future regarding Canadian pensions and how that comes into play with saving for retirement?

    1. Desirae

      Oooooh, do you mean like CPP and OAS? Or government / public service pensions? I know a teeny bit about CPP and OAS, but woefully not much about Actual Pensions since I’ve always worked in the private sector. (My short answer on CPP/OAS is “I think it’s a great safety net but I’m still saving as much as I can towards retirement just in case,” lol.)

      And I am going to write so much more about house savings coming up soon! Kudos on the return and sending it towards that goal – it’s an exciting one!

      1. Michelle

        A little bit of both! I’m an RN, so part of my benefits is having employer matching pension contributions. As far as I know, all signs point to this being “good”, but really don’t know much about how having a pension balances with CPP and OAS.

        1. Desirae

          Oh that’s awesome Michelle! That is definitely a good thing, haha. The one thing I DO know about pensions is that they make the TFSA a great bet for you – you can contribute the same amount as anyone else, and it doesn’t count as “income” in old age, so it won’t tip you over the point where CPP and OAS start to get clawed back. (Which is like, 78K in today’s dollars or something like that? So I mean, you’ll be doing OK either way if you’re above that point, but still!)

  8. Kate @ Making it Rain

    Fun post! When I can actually get around to filing (almost there!), a good chunk of mine is going toward student loan repayment because it just feels so great to be able to put down a lump sum, and the rest going to charity and my travel fund 🙂

    1. Desirae

      That’s so awesome Kate! Lump sum payments really do feel fantastic – watching that jump in the numbers just feels like SO much progress, haha.

  9. Brittany @ Tiny Ambitions

    Old me would have for sure spent most of my tax return- thank goodness old me is gone! This is the first year I’ve been able to access my tuition credits (ya grad school!), so my return is pretty sizeable. It’s currently sitting in a TFSA I have ear marked for my tiny house! Thanks to my return I am 10% of the way to my goal!

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