4 Ways to Spend Your Income Tax RefundApril 5, 2018 12:00 am
Each year about 8 out of 10 American taxpayers will receive a refund. There are arguments both for and against having so much tax withheld from your paycheck or other income sources that you wind up getting a refund. Some argue that overpaying taxes is essentially an interest free loan to Uncle Sam. Others prefer to use tax withholding as a form of forced savings because they would otherwise tend to spend the money if it ended up in their bank account. Sometimes it’s just not that simple to figure out what your tax liability will be for the year, and next year won’t be any different with the recent passing of the Tax Cuts and Jobs Act.
If you will be getting a refund, you are now faced with the decision of what to do with it. Here are some suggestions on ways to use the money that will hopefully improve your current and future financial position.
Pay Off Debt
Paying off debt is probably my top choice of how to spend your tax refund. Is there a bit left to pay on your car or school loans, or do you have credit card debt hanging around on your balance sheet? Mortgage debt excluded, I love the idea of wiping out or making a substantial dent in outstanding loan balances. Even if you have loans at 0% interest, they will need to be paid back at some point. Why not work at getting them paid off sooner, thereby allowing you to invest or use the money being allocated towards that debt for a more productive purpose? With debt paid off, you can concentrate on other areas of your retirement plan or portfolio that need attention.
Fund your Emergency Reserve
I can’t think of a better way to spend your tax refund if you don’t already have an adequate reserve in place. Establishing or beefing up an emergency fund will save you from taking on debt and landing in financial trouble when unexpected expenses arise such as a home or car repair, job loss or an illness. All too frequently I see people who fall into financial hardship because they didn’t have adequate or any funds available in an emergency situation, and they wind up using credit cards to pay for it. Generally emergency reserves need to be funded over time and replenished after a need arises and the funds are accessed. Depositing your refund can be a great opportunity to get your emergency reserve fund to the proper amount or level.
Make a Traditional or Roth IRA Contribution
For this option you will, of course, need to adhere to IRS eligibility rules, but if you meet the requirements, this is another great option for your tax refund. For 2017 and 2018, those under the age of 50 are eligible to contribute $5500 to an IRA with a catch up provision of $1000 additional for those over 50 years of age. If you have already maxed out your 401k or other retirement savings account and are eligible, a Roth contribution is a great option to invest in your future and avoid future taxes if using the funds for retirement. If you are eligible for a deductible traditional IRA contribution, you will be saving for your retirement and saving yourself money in taxes as well.
Fund a 529 College Savings Plan
I find that the thought of saving enough money to cover college costs for many parents can be overwhelming. Unfortunately, some feel that fully funding college is so out of their reach, that they disregard it all together. While it may be unrealistic for all parents to fully fund college for their children, there is a huge benefit to having some savings lined up to cover tuition and other costs. Saving early on gives the investment the opportunity and time to grow, and the benefit of the 529 plan’s tax deferred status makes choosing the 529 vehicle a valuable choice.
Paying taxes may be a fact of life, but how you spend your refund is entirely up to you. Consider one of these options to sure up your balance sheet now and for the future.
Chrissy Canapari serves as Senior Financial Advisor and Manager of Client Services at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at firstname.lastname@example.org.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Chrissy’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.