5 Smart Things to Do With Your Tax Refund
While it’s temping to splurge on something, here’s where the experts say are the best places to put the money
A majority of Americans expect to receive a tax refund this year. As of early April, the IRS said it had issued more than 77 million of them. The average amount: $2,815.
While many of us look forward to a refund every year and even fantasize about what we’ll do with it, financial experts are more skeptical. They argue that getting a big refund simply means we’ve had too much money withheld from our paychecks — and that we’ve lost the use of that cash during the year.
Whichever side of the debate you come down on, this once-a-year windfall is worth handling wisely. Indeed, a recent Marist Poll found that only 15 percent of taxpayers said they planned to spend their refunds, while 47 percent intended to pay bills and 38 percent would save it.
If you’re awaiting a refund and trying to decide what to do with it, here are some suggestions, listed in order of financial priority.
1. Build your emergency fund. If you don’t already have some money set aside for unexpected bills, such as a costly car repair or a trip to the emergency room, establishing an emergency fund should probably your first priority. Financial planners often suggest that people try to accumulate six months’ worth of living expenses in a separate account, just in case. That’s easier said than done these days, but a tax refund can be a good start.
2. Pay off your credit cards. With the average interest rate on credit cards pushing 15 percent, paying off any outstanding balances will give you a greater return than almost anything else you could invest in, guaranteed.
Paying down debt might be even smarter than building an emergency fund for some people, according to Marge Schiller, financial planning manager with Goar, Endriss and Walker in Sarasota, Florida. For example, if the cash in an emergency fund would be too big a temptation, you might do better to pay down your credit cards or home equity line of credit, if you have one, and plan to borrow from them in an emergency, provided you stay well below your credit limit.
3. Make home repairs. If you’ve been postponing necessary work because you didn’t know where the money would come from, your refund could be the answer, Schiller points out.
4. Invest for retirement. Probably the best place to invest your refund, once you’ve checked off numbers 1 through 3 above, would be in a retirement account, such as a traditional or Roth IRA. Which of those you might choose will depend on your eligibility and whether you’d prefer a tax deduction now (with a traditional IRA) or tax-free withdrawals later (with the Roth version). Either way, your account will grow tax-deferred and you’ll be all the richer come the day you retire. The IRS explains the IRA rules on its website.
5. Save for the kids’ college. This one comes after investing for retirement for a good reason. Most financial planners will tell you that your retirement should come first, often pointing out that a child can borrow money for college if need be, but no one is likely to lend you money to retire.
Another argument is that by taking care of yourself first, you reduce the likelihood that you’ll ever have to impose on your children financially — a good thing for everybody concerned. But if you’re squared away for retirement, saving for college would be another good goal, particularly if you do it through a tax-advantaged 529 plan.
Whatever you decide to do with your refund, note that you’ll get it faster if you ask for direct deposit than wait for a check. Plus, you can have your refund split among as many as three different accounts, in case you have more than one smart use in mind for it.