Though spending the money you obtain each year from your tax refund on expensive things may be tempting, there are ways you can make this money work towards a better future.
Start invest your tax refund
That incredible trip, or a new gigantic TV may be the first things you think of when you receive the money during tax season. And, of course, you can choose to go ahead and buy them.
But, a much smarter thing to do with your federal tax refund is to save it and invest it in your future. Here are 3 smart money moves we suggest that you take the time to analize:
1. Invest for your retirement
Whether you plan on retiring early or not, this is a great option to invest your tax refund this year (and every year). You can put up an account sepecially for this or if you already have your own IRA or Roth IRA, this can be used to help you max out your contribution.
The main difference between Roth IRAs and most other tax-advantaged retirement plans is that instead of granting a tax reduction for contributions to the retirement plan, qualified withdrawals from the Roth IRA plan are tax-free, and growth in the account is tax-free. Putting most of your tax refund into your Roth IRA, helps you get a jump start on the new years’ contributions. The extra few hundred or thousands can really elevate your retirement savings money and you’ll be surprised at what these retirement investments can lead to 5, 10, or 30 years down the road.
2. Start investing in a 529 Plan
If you are starting a family or have kids getting close to starting school, a 529 plan can be a great way to invest for their future (and yours).
A 529 plan is a plan that helps you save for college and offers tax and financial aid benefits. 529 plans can also be used to save and invest for K-12 tuition in addition to college costs. There are two types of 529 plans: college savings plans and prepaid tuition plans. Looking into these alternatives as an option for your refund money investment, is a really good idea if you have children
3. Invest or save your tax refund for emergencies
One last way this money can help you have a better future, is to put it towards an emergency fund. You may put aside this money at home or you can open a special account for this purpose and put your money to work.
The idea is that the fund helps out when unexpected expenses appear. High-yield saving accounts pay more than standard saving accounts and can be a great option. Many Americans have no more than $1000 saved, and this can be a real problem if there is an emergency you can’t pay for. So, instead of thinking of how you can spend your refund, think of how it can help your savings.
SMART WAYS TO INVEST YOUR TAX REFUND
1. Invest in assets besides stock market
Iinvesting in stocks and bonds may be the first investment we think of, but is only one area where you can put your money to work in. It is, of course, a smart decision for retirement and your other financial goals, but there are many other options you can look into.
Diversification is important and it is important for your money to have numerous options for growth. So analizing new aletrnatives is a good idea.
Some examples of alternative investments can be real estate (crowdfunding, rental properties, rehabs, etc.), investing in commodities (silver, gold, etc), or investing in arts.
2. Make extra high-interest debt payment
Has a high-interest credit card balance been a worry for some time? Have you been struggling with old bebt such as medical bills, or student loans? Your tax refund money can be used to tackle that debt at last.
Start with debts with the highest interest rates, this not only helps cut down your debt a little faster, but can save you on some yearly interest. If you don't have any credit card debt, use your tax refund to reduce your car or student loan debt.
3 Increase your resale value
If you own your home and have been waiting to replace a leaky pipe or start a much-needed home improvement project, your tax refund might be a good time to make your home more functional while increasing its resale value.
The same thing can apply to your car. If you have been postponing an expensive car repair this money can help you pay for it. These types of investment can be beneficial for your everyday life and family, and can increase the resale value of your home or car as well.
4. Invest in others
Use your extra money from your tax refund to invest in others, for example by donating it to a cause you believe in. You will be helping others through those charities, but you also get a tax-break on your contribution. This, of course, shouldn’t be the main reason to help others, but it it is an added benefit.
You can also invest in others outside of charities, If you have a well-established financial portfolio and are near retirement age, you may want to consider gifting excess funds, such as a large refund, every year. The IRS sets an annual limit ($15,000 per recipient, as of 2019) on the gifts individuals are able to transfer to others, including family members, without filing a gift tax return.
INVEST YOUR TAX REFUND IN YOURSELF
1. Invest in your business or side hustle
If you are starting your own business or another side hustle, investing your tax refund in your project is a great idea. Although the costs to start up a business or side hustle may not involve large expenses, you may need to spend money on a website, products or advertising.
These may not be very expensive things and your tax refund check may be able to pay for all you need to you get started.
2. Expand your knowledge
Even though investing in your business or side hustle could be considered an investment in yourself, this is not what I’m talking about. Your career or any business or side hustle you start, depend on your knowledge and expertise. Investing in courses, books, conferences, seminars or postgraduate studies are always a good idea. You can use your tax refund check for further education and your ROI can be enormous.
3. Invest in your HSA
Your success at anything depends on your health, so taking care of it is essential. If you have a HSA or are looking to open one, you may want to invest your tax refund money there. This is a way to ensure you are covered for future medical expenses, but is also a way of putting your money to work.
HSA account have some major tax benefits and this is how it works: Pre-tax money goes in (or your own contribution that is deductible), you owe no taxes on growth, and you owe no taxes on withdrawal for medical expenses. So not only do you take care of your future health but can get more tax benefits in future years too.