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The average federal tax refund is more than $3,000, according to the latest data from the IRS.
Since the vast majority of taxpayers receive refunds, there’s a good chance you’ll get back hundreds, if not thousands, of dollars in overpaid taxes, especially if you owe a refund from your state government. .
That money can feel like a windfall, and it’s easy to waste it on a variety of small things.
But if you want to improve your current financial situation, try these seven things. Ideas to consider. Well, technically he has six, but the seventh would be the most enjoyable.
If you have a balance on your credit card and are paying 20% to 30% interest, make paying it off a priority.
With such exorbitant interest rates, “your debt can grow faster than you can pay it back,” says Eric, a certified financial planner and tax director at Betterment, a robo-advisor financial services company that also has a team of human advisors.・Mr. Bronnenkant says. We are standing by to support our clients.
Keanna Russ, a certified financial planner at Four Pounds Financial Planning, agrees that people’s awareness of how much interest they pay over time doesn’t necessarily reflect that. Agreed.
“What I often see is people who are paying the bare minimum, or who are charging daily living expenses and not paying their bills at the end of the month. They don’t understand why they’re paying for it,” Russ said.
For example, if you have a balance of $3,000 at 27% interest and only pay the required minimum of $97.50 each month, it will take you 240 months (or 20 years) to pay off just $3,000. According to Bankrate.com’s calculator, you’ll pay $3,044.57 in interest, for a total of $6,044.57.
You can use your refund to start or strengthen your emergency fund.
When it comes to costly emergencies, many Americans don’t have at least three months’ worth of living expenses aside, much less enough to easily cover an unexpected $1,000 bill.
Rath pointed out that online banks usually offer the best interest rates, and suggested making sure to stash your money in a high-yield savings account at an FDIC-insured bank.
If you have high-interest debt and don’t have enough emergency savings, Rath suggests using a portion of your debt to pay off the debt and the rest to create an emergency fund. did.
Bronnenkant is a proponent of paying off high-interest debt first, but if you have low emergency savings and need important repairs, such as your car, to keep your job. Stated. It may make sense to set aside money for that repair and put the rest toward credit cards or other high-interest debt.
If you have a mortgage with a high interest rate (such as 7% to 8%) and you don’t have credit card debt, you may want to consider making an extra payment or two. “It could make a difference for principals in the long run,” Russ said.
Bronnenkant said it can also be considered an additional form of savings in the sense that you can save an extra 7% or so in interest on the principal portion while you are repaying it.
If your income qualifies you to contribute to a Roth IRA, you can contribute up to $7,000 ($8,000 if you’re 50 or older) this year in after-tax savings. That money grows tax-free until retirement, at which point withdrawals after age 59 1/2 are tax-free and penalty-free, as long as the account has been open for at least five years.
(Note: 2023 Roth contributions can be made until April 15 of this year. Contribution limit It’s $6,500, or $7,500 if you’re over 50.
Growing your tax-free retirement savings is great. But if you need to access some of your funds long before you retire, you can always withdraw some of your contributions tax-free and penalty-free, Bronnekant said. You are subject to taxes and penalties only if you withdraw the earnings of your contributions before age 59 1/2.
(For more information on Roth IRA withdrawal rules, here’s an easy-to-understand explanation) run down (from Charles Schwab)
When it comes to saving for retirement, if you haven’t yet contributed enough to your 401(k) to receive the full amount from your employer, a refund can make it easier.
Let’s say you get $3,000 back. You can put that money in a high-yield savings account and earn interest. Then, on his workplace’s 401(k) site, he changes his salary contribution level so he contributes $3,000 more before taxes by the end of the year.
For example, let’s say you get paid every two weeks and have 20 paychecks left until the end of the year. You can increase your biweekly contributions by $150 per paycheck ($150 x 20 = $3,000).
“We want the best possible terms from our employers,” says Bronnekant.
If you want to buy a home, take a once-in-a-lifetime trip, redecorate your home, send your kids to summer camp, or have any other expensive goals in the next 3 to 10 years, your refund can be Please consider investing in it. It is a diverse combination of low-cost, broad-market index funds.
The shorter the goal, the less risk there is. If you need the money within three years, you may consider putting your refund in a certificate of deposit or a U.S. Treasury bond.
But if your goal is five to 10 years out, and you’re comfortable taking on some risk and accepting market fluctuations, you can put up to 30% of your payback in an equity index fund, Bronnekandt says. Stated. If your risk tolerance is conservative, he is 70% of all market bond funds. 50% each if you have a medium risk tolerance.
If you plan to send your child to college and have a 529 plan, you can use the refund to increase your contributions to that plan, Russ said. Depending on your state, you may also receive a tax deduction for your donations.
Unless you’re in really dire financial straits, if you get a large refund, you might set aside a small amount to do something you really love.
“Sometimes you just want to have fun and not make it all a business,” Russ says. “You can set aside some of your money for fun.”
