8 Smart Ways to Use Your Tax Refund

 

Tax season is around the corner and many people look forward to getting that refund check in the mail.  If you are lucky enough to have one coming your way, consider using it to boost your financial situation in a smart way. An average tax refund is around $3k which is a nice amount that you could put towards a number of financial priorities.

Below are eight smart ways to use your tax refund.

Pay down credit card debt  

If you are carrying high interest credit card debt, this should be the first thing you put your money towards.  The return on your money is equivalent to the interest rate on the card and it is guaranteed and carries no risk.  If your credit card has an interest rate of 26% for example, then you are getting a 26% return on every dollar you put towards your debt.  This beats what you will receive in the market any day.

When looking at other debts like mortgages, student loans and car payments, you may think it is a good idea to put money towards those as well.  Keep in mind though that these debts do not carry as high an interest so your return will not be as impressive.  Just be sure to weigh all the possibilities.

Put the money aside for a rainy day

Having an emergency fund should be top of the list when it comes to your personal finances.  In an ideal world, you want to have at least six months worth of living expenses saved up.  Your tax refund could be a nice deposit into that fund.  If something unexpected arises, you will not need to put it on a credit card.

Contribute to your employer matched 401k

Putting money into your employer matched 401k is one of the best ways to invest your money.  Match it dollar for dollar to get the most benefit.  One way to get access to additional monies for this is by decreasing your withholding.  Just be sure to boost your contributions so that you do not end up spending those extra dollars elsewhere.

Put money towards a HSA account

If your health insurance carries a high deductible and it offers you a Health Savings Account, you can invest your money there.  HSAs are great because they are tax free three times over. When you put money into the account it gets deducted from your paycheck and goes in tax free and continues to grow tax free as well.  When it is time to withdraw the money, it is not taxed as long as the money is being used for medical expenses.  You can also simply use the account for "investment" purposes and leave the money in there to grow.

When you reach 65, any withdrawals you make that are not for medical reasons are treated like a  401(k) withdrawal and are taxed at your current income tax rate.  For investment purposes, this rivals the Roth IRA since it is pre-tax money and it grows tax free too.

Invest in an IRA

If you already contributing to your workplace retirement plan or you currently do not have one in place, contributing to an IRA is your next step.  They have both a traditional IRA and a Roth IRA.  With the traditional one, your contributions are tax-deductible on your tax return for the year you made the contribution but you are taxed when you withdraw the money (you can start at 59 ½ and must start withdrawing by 70 ½). With a Roth IRA, there’s not tax break but your earnings and withdrawals are tax free.  An additional benefit is that you are not required to make withdrawals, so the money can be passed on to your kids or whomever.  They also afford you some flexibility where you can withdraw funds without a penalty for buying a home or to use it for your education.

Invest in a college fund

If you have a solid retirement plan in place and you are making the necessary contributions, investing in a 529 college savings plan for your child's education is a smart move. Like a Roth IRA, your contributions are made with after-tax money and your money is then invested and will grow tax-free.  Provided that you use the funds for education, you will not need to pay any taxes.  One thing you do not want to do, is do this prior to establishing a retirement fund.  This only applies if you are already taking care of that and you have extra money to put away.

Donate to a charity

If you are financially able, investing your tax refund money in a charity is a great thing to do.  Focus on the ones that are doing good and are reputable.  Check out Givewell.org, which is  a not-for-profit that gives you background information on various charities to find a good fit.

Save for a vacation

When it comes to vacations, one thing you do not want to do is to fund them with your credit card.  If it makes sense, put your tax refund aside for your next adventure.  Saving it for holiday gifts or for a downpayment on a car or house is a good idea too.

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