You filed your taxes, and now are awaiting a refund. The Internal Revenue Service's data shows the average it had issued as of April 5 was $3,011.
That three grand average is a nice chunk of change. Even a smaller amount is welcome.
So, what are you going to do with that money?
Everyone's personal, financial, and yes, tax, needs are different. But here are some suggestions for all y'all getting a refund.
1. Open or add to a savings account or emergency fund. I know, stashing away your tax cash for future spending is the boring, adult thing to do. But we all need a cushion. A slim majority of people surveyed earlier in filing season by Ziff Davis for RetailMeNot about their tax refund plans agreed. Thirty-eight percent said they would save their refunds.
When the savings are dedicated to cover unexpected expenses, you'll be able to better cope financially when your car breaks down or your daughter fractures her arm playing hockey. And a regular savings account can help with more enjoyable pursuits, like a special vacation, especially if you find one still paying decent interest rates.
2. Pay off high-interest debt. Close on the heels of the RetailMeNot savers are the 33 percent of survey respondents who said they will pay down or off their debts. This could make a real difference to those who are looking at double-digit interest rates on unpaid credit card charges.
Don't believe me? Check your latest credit card statement. It will have a notice like the one below for a card with a $4,600 balance. OK, it's my card I used to pay for coverings for our new energy efficient (and tax credit eligible) windows we got last year. The bottom line is that if I don't pay it off, or make only minimum payments, the costs will be substantial.
If you don't have a statement with your interest and payoff information handy, you can use WalletHub's credit card payoff calculator to see how much in interest charges you can save by making larger payments.
The good news for the hubby and me is that we had a home improvement savings account (see #1 above) to cover both the replacement windows and treatments. We paid off the card, avoiding its 17.4 percent annual percentage rate. A tax refund can serve the same purpose.
3. Contribute to a retirement plan. If you have an IRA, put your refund into it. If you don't, open one. A Roth version is generally the best choice of retirement arrangement for younger workers. In 2024, you can contribute up to $7,000 to a Roth IRA, $8,000 if you're 50 or older.
You can't deduct Roth IRA contributions, but you're already taxed amount grows tax-free, not just tax-deferred like in a traditional IRA. Plus, when you do retire and start taking out your Roth IRA funds — at your own pace, since there's no required minimum distribution (RMD) for these accounts — the withdrawals are tax-free, too.
If you have a workplace 401(k) plan, either traditional or Roth, increase contributions to it by the amount of your refund. Your tax cash will offset the 401(k) money coming out of your paychecks.
4. Set up a college fund. The burden of student debt has been in the spotlight for years. You can help your children, or yourself if you expect you'll be paying part of your youngsters' higher education costs, by saving now. A tax-advantaged 529 plan is one of the best, and easiest ways to save. Not only do these plans offer federal tax-free growth and withdrawals for qualified education expenses, but some states also offer tax deductions or credits for contributions.
5. Invest it. Investment returns aren't guaranteed. And yes, the markets have been, as the experts say, correcting of late, so this option is not for the faint-of-heart. But long-term, equities can pay off. Plus, diversifying your money's earnings is a good idea.
Investing also is not for those expecting quick cash. In fact, you want any money you put into taxable investment vehicles to stay for more than a year. That way, when you do sell, your profits will be taxed at your lower capital gains tax rate.
There are lots of portfolio options, from individual stocks, mutual funds, exchange-traded funds (ETFs), bonds and bond funds, and even cryptocurrency. Investment companies offer a lot of basic advice online. Some even have robo-advisors that automate investment choices. But if you're new to investing, you might want to consider a personal investment advisor.
6. Treat yourself. OK, this may not the wisest financial advice, but hey, we all need a little (or lot of) self-care now and then. So don't feel guilty about using at least some of your tax refund for a nice meal out with your significant other or friends. Get a full day of spa treatments. (When I win the lottery, I'm hiring a full-time foot masseuse!) Buy those new shoes (or whatever is your shopping obsession) you've been wanting forever.
If you're still trying to decide what to do with your tax refund, I hope these suggestions help. Maybe one day I'll get a refund and get to take this advice myself!
You also might find these items of interest:
- Where is your tax refund? IRS tracking tool aims to answer annual query
- Beware latest tax scams: fake IRS refund emails to taxpayers, EFIN phishing of tax pros
- May 17, 2024, is the deadline to file for your part of $1 billion in unclaimed tax year 2020 refunds
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