Smart Ways To Invest Your Tax Refund
If you are one of the many Americans who will get a significant tax refund after filing this year, you might be wondering how you should invest your tax refund. The experts at TaxAct have a few ideas that you can bank on.
Stash it in a savings account or emergency fund
While saving may not be the most exciting option, it’s always good to have some cash on hand in case you need it.
One good option is to invest in a health savings account. HSAs are a tax-free way to save for medical expenses like copays, prescriptions or even COVID-19 tests. HSA funds are an excellent option for savings because you do not have to use the funds in a calendar year.
Many personal finance experts tend to recommend saving three to six months of expenses as an emergency fund. An emergency fund protects you and your family against unforeseen situations such as job loss, sickness or a hefty repair bill. How much you should save depends on your family’s financial circumstances, cost of living and risk tolerance.
Pay down high-interest loans or credit card debt
Do you have any high-interest debt? If so, consider putting your tax refund toward paying that debt off faster. If you have multiple debts, a good rule of thumb is to pay off the debt with the highest interest rate — this will save you the most money in the long run. For most people, high-interest debt can include credit card debt, certain student loans or a car loan.
Boost your retirement nest egg
Another good idea is to pay your future self by putting your tax refund toward retirement savings, like a traditional IRA or Roth IRA. This may even earn you a tax break next year.
Don’t forget about contribution limits, though. If you exceed the annual IRA contribution limit, you may have to pay double the taxes. You have until the tax filing deadline to make contributions for that tax year.
Don’t feel left out if you only have a 401(k) through your employer. Though you can’t add outside money to your 401(k), you can opt instead to put your tax refund toward everyday expenses and increase your 401(k) contributions.
Invest in education
If you have children, nieces, nephews or any child in your life in need of college savings, 529 plans are a great way to save for higher education expenses.
Qualifying education expenses covered by 529 plans include college tuition and K-12 public, private or religious school tuition. You also can put the money toward books or room and board.
The best part? The funds are tax-free as long as the 529 beneficiary spends the money on qualified education expenses.
If you don’t need your tax refund money for any urgent needs, consider one of these strategies to help your financial situation in the long run (or someone else’s).
This article is for informational purposes only and not legal or financial advice. All TaxAct offers, products and services are subject to applicable terms and conditions.
