5 Ways to Make the Most Out of Your Tax Refund
Tax refunds are often thought of as a great way to catch up on household bills. For others, it’s used as a way to splurge on a great pair of shoes, and for some, it pays for airplane tickets to a tropical destination. It might not seem exciting, but a tax refund can also be looked at as a way to save and invest.
“Keep in mind that if you get a modest 5 percent rate of return each year, $2,500 today turns into almost $8,500 in 25 years, more than tripling your savings,” according to USA Today. “If you find a way to invest an additional $2,500 every year, you’ll be sitting on more than $133,000 in 25 years.” Hoping to make money off of your tax refund this year? Here are a few ideas to help get you started.
1. Contribute to a Roth IRA
A Roth IRA lets you put money away, which will grow to be tax free after you turn 59 1/2 — as long as you’ve had the account open for a minimum of five years, writes Forbes. So, let’s say you put $2,700 into that account. It will earn 7 percent on average per year, meaning it will grow to be worth more than $10,000 in 20 years. Now, imagine if you contribute that every year — you’re then looking at a tax-free account that has more than $118,000 in it. Further, your earnings can also be used penalty free for expenses related to education or first-time home purchases.
2. Fund a Taxable Account
“Use the extra cash to buy shares in a mutual fund or stock you’ve been considering — but may feel is too risky for your IRA or not available in your 401(k) plan,” Kiplinger writes. You could start with something such as an S&P 500 ETF, according to USA Today. It spreads your money across the components of the S&P 500, which includes corporations such as Walmart (NYSE:WMT), Google (NASDAQ:GOOG), and Ford (NYSE:F).
3. Divert it to Your 401(k)
The only way this works is if you talk to your benefits coordinator, because technically money can’t be deposited into a 401(k) if it doesn’t come through your employer. But, USA Today writes that if you use your tax refund for living expenses (which is how you’d use a paycheck), you can have the same amount put directly into your 401(k) plan. “Here’s an example: You take home roughly $1,200 a month after taxes and health insurance. Your tax refund is for $2,400. For two months, you will live off your tax refund while your regular paycheck is diverted to your 401(k). After two months, everything goes back to normal.”
4. Emergency Fund Investing
Because it’s your emergency fund, your first priority needs to be putting it someplace that is accessible. That means you’re looking at options such as a high-yield bank savings account or money market deposit account, Bankrate says. Taking advantage of one of those accounts means your money is accessible in case you need it. And, as an added bonus, it’s FDIC-insured.
5. Pay Down Debt
Investopedia recommends paying down a high-interest credit card. This is a great way to get greater returns because as the balance you owe to credit card companies goes down, the finance charges you have to pay on that debt also goes down. “Depending on your interest rate, you’ll be saving anywhere from 10 percent to 29 percent per year in interest on any portion of your balance that you manage to wipe out.” By using your refund to pay off even $1,000 in debt, it will save you hundreds in finance charges.