Should you spend or save your tax return in retirement?

Expecting an income tax refund this year? Before deciding whether to spend it or save it, consider how you can balance immediate enjoyment with long-term financial goals.

If you submitted your income tax return already, you may be looking forward to receiving a refund. Should you splurge on that much-anticipated trip or new car? Or should you invest it for your future? The answer might be both.

Here's the reality: You don't have to choose between enjoying your refund now and securing your ideal retirement. Here are six smart ways to save your tax refund – and why finding a balance between spending and saving might be the best approach.

1. Bolster your emergency fund

Even in retirement, consider maintaining an emergency fund. Aim to have 3-6 months of living expenses readily available. This becomes especially important as you transition from regular employment income to retirement savings and pensions.

It’s a good idea to keep some funds in a high-interest savings account or a Tax-Free Savings Account (TFSA) if you have contribution room. Having this cushion can prevent you from dipping into your retirement savings early, which could increase your tax burden.

2. Maximize your RRSP contributions

If you're under age 71, consider topping up your Registered Retirement Savings Plan (RRSP) to help maximize your savings and save on tax.

Here’s a few things to keep in mind:

• For the 2026 tax year, you can contribute up to 18% of your previous year's earned income, to a maximum of $32,490.
• You can contribute to your RRSP until December 31 of the year you turn 71.
• Even modest contributions can significantly impact your retirement fund.
• Automating your savings can help you save even more. You won’t have to think about it when the deadline rolls around. And the interest on your money will compound over the whole year.

3. Pay down high-interest debt

Entering retirement debt-free can help significantly reduce your financial stress.

Consider prioritizing paying off high-interest credit card debt. Eliminating debt payments can help free up more of your retirement income for enjoyment or reinvestment.

4. Consider your mortgage strategy

If you still have a mortgage, paying it down before retirement can help provide peace of mind and reduce monthly expenses in retirement. However, weigh this against other financial goals, such as maximizing retirement savings.

Talk to your advisor to determine the best strategy for your situation, especially considering current interest rates and your retirement timeline.

5. Invest in a TFSA

RRSPs have long been a popular choice for retirement planning. Canada’s other savings option, the TFSA, is not as popular as a retirement savings tool as it could be. If you’re not saving in, or maximizing, a TFSA – you might want to reconsider. Especially if you’re retired or about to be. Here’s a few reasons why:

• Unlike RRSPs, TFSAs have no age limit for contributions.
• Withdrawals are tax-free, making TFSAs an excellent option for helping to supplement your retirement income.
• The annual contribution limit for 2026 is $7,000, with cumulative room available if you haven't maximized contributions in previous years.

Are you looking to open a TFSA for the first time? If you’ve been a resident of Canada and were 18 years of age or older when the Government of Canada first introduced TFSAs (in 2009) then your contribution room could be as much as $109,000 in 2026.

6. Invest in life insurance and critical illness coverage

Maxed out your RRSP and TFSA? Consider protecting yourself and your loved ones with life insurance or critical illness insurance.

Permanent life insurance provides dual benefits: it helps protect your loved ones while accumulating cash value that grows on a tax-deferred basis. You can use your refund to pay all or most of your premiums at one time, making it easier to secure coverage without ongoing monthly obligations.

Critical illness insurance provides a lump-sum payment if you're diagnosed with a covered serious illness such as cancer, heart attack, or stroke. This tax-free payment can help cover medical expenses, lost income, or necessary lifestyle adjustments during recovery. Using your tax refund to secure this coverage offers valuable peace of mind and financial protection when you need it most.

For illustrative purposes only. Individual circumstances may vary; talk to your advisor for personalized advice. Assumes a 6% average annual return (compounded annually); inflation and tax implications not factored.

Finding your balance

The decision to spend or save your tax refund depends on your personal circumstances. If you're debt-free with a solid emergency fund, treating yourself might make sense. If you're building your financial foundation, prioritizing savings could be wiser. Or you might find that a balanced approach – doing both – gives you the best of both worlds.