Each year, millions of taxpayers in the United States assess their taxes. Even though the past few years weren’t the easiest tax year by any stretch of the imagination, refunds are currently making the rounds into bank accounts nationwide. The big question on everyone’s mind is the best way to put this extra cash to use.
So, if you’re looking for a sure way to invest your tax refund, you’re in the right place.
Clearly, recent factors like the American Rescue Program and the Child Tax Credit rendered it more challenging to estimate refund amounts for several people. So how can prudent investors make the most of their earnings in light of this added unpredictability?
There is such a wide variety of ways to spend it! Before you give in to your impulses and fill the shopping carts with stuff you don’t need, you should learn how to invest money to improve your financial stability.
So, this post will show you ten great options to invest tax refunds for maximum returns.
1. Fuel Your Emergency Fund
Unpredicted costs are a part of life. Nevertheless, you may go into debt if you don’t have enough money to cover these unforeseen bills.
That’s why it makes sense to invest tax refunds into an emergency fund, depending on your current financial conditions. The general norm for everyone understanding personal finance is having at least three to six months of savings.
When deciding where to save your emergency cash, you have a few alternatives:
High-interest Savings Account
As the name implies, your money’s yield (interest return rate) is far more significant than it would be with a regular checking or savings account.
Money Market Account
Since savings accounts are for saving, you can’t write checks on them. Money market accounts, on the other hand, let you write checks and have higher interest returns than savings accounts.
2. Renovate Your Home
If financial constraints have forced you to postpone home renovations, your tax returns might be what you need to get the ball rolling. This might involve repairing a leaky roof and updating your bathroom or kitchen.
Doing so will not only enhance the overall quality of your life but also has the possibility of helping increase the value of your property. In other words, everyone benefits.
Repairing your vehicle is another fantastic method to put that money you got back from your taxes to profitable use.
The average American spent roughly $2,000 on car repairs from 2014 to 2019, per a poll conducted by Ally Financial, and almost four in ten reported being unable to pay a $400 emergency bill without selling something or going into debt.
Hence, one of the fastest tax refund uses is throwing the money at your car’s maintenance costs, especially if its dashboard reminds you of your Christmas tree decorations.
3. Invest in Your Retirement Scheme
Investing your tax refund in your retirement account is a smart option if you don’t have any immediate financial requirements or high-interest debt. A little tax return can become a sizable source of retirement income if invested wisely over several years in a tax-deferred retirement plan.
For example, a Roth IRA is a common retirement plan chosen by younger individuals just beginning their professional lives. Contributions to an IRA are subject to income tax, whereas withdrawals made after reaching age 59 1/2 are not. In 2023, the maximum Roth IRA contribution amount rises to $6,500 (from $6,000 in 2022) and $7,500 (from $7,000 in 2022) for those 50 or above.
You can also invest your tax refund in a standard individual retirement account (IRA). In contrast to a Roth IRA, you will be subject to taxes following retirement when you withdraw money from a traditional IRA, but you can deduct contributions from your taxes.
In 2023, contributions to a regular IRA and a Roth IRA are capped at the same level. But remember that if you reach 72 in 2022 or 73 in 2023, you will be obliged to make the required minimum distributions (RMDs) from your standard individual retirement account.
If you have a 401(k) plan, you can use your tax refund to increase your pre-tax payments. This is another smart approach to saving as much as possible for retirement. Your 401(k) deductions may hurt your salary now, but they’ll be worth it in the long run. And if your employer matches your payments, it’s like getting free money for nothing every time you put money into your retirement account.
You can determine the rough figure you’ll have saved up for retirement with the help of an online retirement calculator.
4. Try the Stock Market
Instead of putting your tax return money into a retirement account, you may diversify your portfolio by purchasing equities or mutual funds.
You can go with an automated portfolio managed by a robo-advisor if you are unsure how to start stock investing.
Robo-advisors are automated investment managers for diverse accounts that use intricate algorithms to optimize the management of their client’s financial holdings. You should know that the robo-advisor has associated fees, but they are much more affordable than those of a traditional financial planner.
A portfolio of actively managed investments can be your best option if you want to be more involved.
5. Invest in Yourself
Few investments will yield better returns than what you invest in yourself.
Do you wish to change careers but need help determining where to begin? Or you may want to advance your career but need more expertise.
If so, it could be preferable for you to use your return to enroll in a boot camp and earn a certification or a cumulative credential that will propel your current professional position forward.
6. Make Extra Mortgage Payments
Put it against your mortgage and move closer to being mortgage-free if you own a property.
The amount of the one-time payment you intend to add could force you to restructure your mortgage, which means adjusting the loan’s amortization schedule. Your creditor will revise the payment plan to reflect the most recent changes to the principal and interest.
Remember, the minimum cost to recast a mortgage is often $5 000.
7. Clear Your Debt
Since few like to consider their financial obligations, this might be your least favorite choice. However, if you have high-interest debt, you should use your refund check to pay it down to save more cash and have more money remaining in your pocket later.
This is particularly relevant for taxpayers carrying high-interest debt like credit card debts or private education loans.
There are two standard methods recommended for eliminating debt:
The snowball approach entails paying off the loans from the lowest to the highest balance. This provides momentum and helps maintain your motivation to keep clearing the debts.
To avoid spending excessive money on interest charges, the avalanche technique recommends starting with the debt with the highest interest rate.
8. Create a Savings Account
Allocating a portion of your earnings to savings remains a wise decision. Open a savings account and set it up so that money goes into your account each time you receive tax returns. It’s an easy way to save money that you won’t even notice. Create a child’s savings account if you have kids to help them learn the importance of saving.
9. Launch a Business
Every day, people all around the country launch new ventures. Statista says in the first six months of 2022, 709,000 new companies were established in the United States.
If you ever wanted to go into business for yourself (whether as a freelancer or by opening a storefront), your tax refund can be the initial funding you need to get things rolling.
Similarly, hiring a web designer or servicing your equipment if it’s showing signs of wear is a good investment if you are currently running a thriving business.
10. Invest in Your Child’s Future
Suppose your kid has a part-time job. You can use your tax refund to open a Roth IRA on their behalf. You may put in up to $5,500, depending on your earnings. This money you put away when they’re young will increase over the years, accumulating interest. Investing to secure your child’s future is the best way to put the refund money to use.
Also, start a child or grandchild out on the right foot by opening an Educational Savings Account (ESA) and saving for their college education. Despite rising tuition prices, students whose families save for their education are far less likely to graduate with substantial debt from student loans.
Many people invest their tax returns in a 529 college savings plan, pay their mortgage early, or leverage the money to launch a business. Ultimately, choosing what to do with tax refunds depends on individual preference.
These ideas are meant to stimulate your investing brains only. Therefore, you must exercise caution when implementing them. Consider the big picture. Also, set aside some time to think about any other valid expenses your tax refund can help you cover and follow suit for any unexpected money that comes your way.