Smart Ways to Invest Your Tax Refund
While you may not enjoy doing your taxes, receiving a healthy refund makes it all worthwhile. Your immediate impulse might be to use that sudden windfall on something you’ll enjoy. But investing that money with the future in mind may ultimately be the better choice, and you’ll have several different options for making your money stretch further.
Pay off your debt
Eliminating credit card debt is one of the smartest things you can do with your tax refund. Kimberly Lankford, a contributing editor for Kiplinger’s Personal Finance, writes that paying off a high-interest credit card balance is like earning that same interest on an investment. If you’re paying 23 percent interest on your credit card, for example, getting rid of that debt is like getting a 23 percent return on your tax refund.
Matthew Goldberg, a consumer banking reporter for Bankrate, suggests the avalanche method for tackling debt. By knocking down the debt with the highest interest rate first, you’ll save more money over time than you would by starting with lower-interest debt — or the snowball method, as Goldberg calls it. If you don’t have a credit card balance, consider using your refund to save money by paying down student loan debt or personal loans.
Build up your savings
If you’re in a fortunate situation where you don’t need your tax refund for anything in particular, you can save it for a time where you might. Using your refund to build or bolster a savings account is never a bad decision, and it’ll seem even smarter if you wind up needing that money down the line.
Socking your money away in a savings account won’t earn you a handsome return on interest. You can opt to open a higher-yield account like a money market, but you still shouldn’t expect to earn more than a few dollars every year unless you can hit a high savings threshold. Still, the peace of mind that comes from knowing you have money to fall back on for unexpected repairs or family emergencies is its own return on investment.
Support your retirement
Retiring and enjoying your golden years to the fullest is the American dream, and there’s never a wrong time to save toward that goal. Ellen Chang, writing for The Street, recommends putting your tax refund in an IRA or HSA to maximize your retirement potential.
If you have an existing Roth or traditional IRA or are looking to start one, you’ll want to consider maximum contribution limits. For 2021, that total is $6,000 for contributors under the age of 50 and $7,00 for 50 and older. If you and your spouse’s adjusted gross income exceeds a certain amount, your maximum contribution will be even less. Ideally, you should hit as close to that maximum threshold as possible to give yourself the best nest egg possible for retirement, and your tax return can help.
Contributing to a health savings account is also a smart choice because it can benefit you now and later. According to Investopedia’s Amy Fontinelle, an HSA can actually be more beneficial than a 401(k) because you’re not obligated to withdraw funds at any time, though you can no longer contribute to your plan once you enroll in Medicare. Better still, withdrawals you make for qualified medical expenses are tax-free, which means your money is untaxed both ways.
Ultimately, your tax return is your money, and it’s your choice how to spend or invest it. Weigh the options available to you and consult with your spouse or partner, and you’ll come to a conclusion that’s best for your and your family’s needs — whether those are the needs of today or tomorrow.
This article is presented by VanDevere Auto Group.