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5 Smart Things to Do with a Tax Refund

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Whether it’s a deposit into your bank account or a physical check that you receive in the mail, it’s nice to collect a refund from the IRS. In 2016, there were 40 million tax refunds and the average amount was $3,120.1

When you’re fortunate enough to receive a sudden payment from the US Treasury, it can be tempting to spend it on a fun, luxury item. However, the other way of seeing a refund is that you overpaid taxes, giving Uncle Sam an interest-free loan. Since you earned every penny of your tax refund, think about doing something beneficial with that “extra” money.

If you’re wondering what to do with your tax refund, here are five smart things to do.

  • 1

    Put the money into retirement savings.  If you are enrolled in a retirement account at work, increase your contributions. Or, look into an IRA through a bank or financial company. Time has a powerful multiplier effect when it comes to retirement savings, so starting early and adding gradual increments over time will make a massive difference in the long run.

  • 2

    Keep some money in a liquid / easy-to-access account for emergencies.  Everyone should have an emergency fund, if only to help you avoid taking on credit card debt when something unexpected takes place. 50% of Americans under age 34 have $1000 or less in savings.2 Yet, the average cost of being in the hospital for three days could add up to $30,000 out of pocket. 3 Build a buffer with your tax refund and avoid running into debt and financial setbacks.4

  • 3

    Pay down some credit debt. Since the average American carries about $1500, and the average household about $9500 in credit card debt, most people are sadly paying out ever-growing interest instead of earning it.5 Clearing away some debt is a great answer to the question of what to do with your tax refund. 

  • 4

    If you’re a parent, start or contribute to a college fund, like a 529. College funds are more and more necessary to avoid significant student loan debt, so getting an early start can make a huge difference for your children. 

  • 5

    Make a free appointment with a financial representative. Many financial institutions offer free consultation with representatives who know a range of financial products and what they can achieve for you as you start building some security. Your financial representative can go through some options of how to invest or spend your refund money wisely.

Now that you have a few ideas about what you can do with that tax refund, let’s remember one thing. A refund on your taxes is not the same as finding money. It’s money that you saved up without making any interest. If you’re an employee, consider asking your payroll department at work whether you could reduce the tax withholding each check, and if you’re self-employed, reduce your quarterly payments a little.

In the meantime, try not to spend this year’s refund on things you don’t need. Instead, use it to fund your future financial security and success.

1 “Tax Refunds Reach Almost $125 Billion Mark, IRS.gov Available for Tax Help,” IRS.gov, Feb.6, 2015    .https://www.irs.gov/uac/newsroom/tax-refunds-reach-almost-125-billion-mark-irs-gov-available-for-tax-help

2.  Megan Elliot, “5 Ways Americans Will Spend Their Tax Refunds in 2016http://www.cheatsheet.com/money-career/5-ways-americans-will-spend-their-tax-refunds.html/?a=viewall

3 https://www.healthcare.gov/why-coverage-is-important/protection-from-high-medical-costs/

https://www.guardiananytime.com/gafd/wps/portal/fdhome/insights-perspectives/workforce-well-being/high-deductible-health-plans-infographic

5. Fred O. Williams, “Measuring Averge Credit Card Debt,” Creditcards.com. Dec.17, 2015   http://www.creditcards.com/credit-card-news/average-credit-card-debt.php

https://www.sec.gov/investor/pubs/intro529.htm