Tax season may not be the most exciting time for Americans, but it can bring a much-needed financial boost for those fortunate enough to receive a refund. The average refund is about $3,500, making it one of the largest single payments many households receive in a year. Despite the temptation to view this money as unexpected, it’s important to remember that your refund is not a gift from the government – it’s actually money you overpaid throughout the tax year. Now that you’re getting it back, you have an opportunity to improve your financial situation rather than letting it slip away on forgettable purchases.
Taking a thoughtful approach to your tax refund can help you reduce debt, increase savings, and move towards a more secure financial future. Let’s explore some effective ways you can make the most of your tax refund this year:
1. Building up your emergency fund: Financial emergencies can happen to anyone, and having savings in place can provide peace of mind. Establishing or strengthening your emergency fund with your tax refund can help you navigate unexpected expenses without stress.
2. Paying off high-interest debt: Using your refund to tackle high-interest debt can save you money in the long run and improve your financial health.
3. Investing in your retirement: Consider putting some of your refund towards your retirement savings to secure your future financial well-being.
In addition to these strategies, we’ll also discuss how you can easily file your taxes from home. By making smart choices with your tax refund, you can take important steps towards financial stability and security.
A certificate of deposit (CD) ensures a fixed Annual Percentage Yield (APY) on your deposits throughout its term, unaffected by market fluctuations. While not suitable for immediate emergencies, CDs are ideal for a tiered savings approach. This strategy involves placing short-term emergency funds in a High-Yield Savings Account (HYSA) and distributing the rest among medium- to long-term CDs to secure high-interest rates.
Valley Bank Online CDs offer consistently competitive rates, Discover Bank CDs feature terms up to 10 years, and Barclays Bank Online CDs have a $0 minimum deposit requirement, catering to most savers. CIT Bank’s no-penalty CDs eliminate fees for breaking the CD before maturity.
Consider avoiding unnecessary bank fees and take advantage of high APY rates, such as up to 4.30% on Valley Direct CDs for deposits up to $500,000. Additionally, CIT Bank offers a 11-month CD with a 3.50% APY and no early withdrawal penalty.
Prioritize paying off high-interest debt to prevent financial strain and foster wealth accumulation. By using your tax refund to address these balances, you can save on interest costs and improve your cash flow. Start with high-interest debt like payday loans, then move on to credit card balances, personal loans, auto loans, and student loans. Two common payoff strategies are the debt avalanche and debt snowball methods, each with its own benefits.
After reducing high-interest debt, consider transferring remaining balances to a 0% intro APR credit card to expedite your debt repayment journey.
Credit cards typically charge a 3% to 5% fee for each balance transfer, but some offer an interest-free period of 12 to 21 months, which can significantly reduce your overall interest expenses. For instance, moving a $3,000 balance from a 22% APR card to a 0% intro APR card with a 3% fee upfront would cost $90 but save you $625 in interest over 12 months. Cards like the Citi Diamond Preferred, Wells Fargo Reflect, and Chase Freedom Unlimited provide some of the longest promotional periods. To maximize this strategy, divide your total balance by the months in your promotional period to set a monthly payment target. Automate payments to clear the balance before the regular APR applies.
Another way to manage debt is through a consolidation loan, consolidating multiple high-interest debts into a single payment at a lower APR. Online banks and local credit unions often offer competitive rates. Consider the differences between debt consolidation, payoff, and counseling strategies.
Boost your retirement savings with your tax refund. By investing in tax-advantaged accounts and compound growth, a $3,000 contribution earning 8% annually could grow to $10,000 in 15 years, $19,000 in 25 years, and $46,000 in 35 years.
Rather than picking individual stocks, consider investing in broad-market index funds like a three-fund portfolio comprising a total US stock market fund, international stock fund, and bond fund. These funds offer growth potential while reducing investment risk. Invest your refund over time using dollar-cost averaging to mitigate market volatility and build your retirement fund steadily.
Many online platforms, such as Robinhood, offer commission-free trading and retirement accounts with traditional and Roth IRA options. Automatic recurring investments with low minimums make it easy to start investing regardless of your refund size.
SoFi Invest offers automated retirement investing combined with personalized guidance, allowing you to open IRAs with as little as $1 and access certified financial planners at no extra cost. These automated accounts have an annual management fee of 0.25%. Alternatively, self-directed retirement accounts with $0 trading fees are also available. SoFi provides up to a 1% match on retirement contributions.
Acorns is a robo-advisor that handles the purchasing and management of your investments, featuring a round-up function that automatically invests spare change from your daily transactions into your retirement account. Instead of an annual management fee, Acorns charges a fixed monthly fee ranging from $3 to $12.
Robinhood offers self-directed investing with $0 commissions and up to a 3% match on IRA contributions. You can sign up for SoFi Invest and Robinhood to access self-directed and automated investing all in one place.
When choosing a retirement account, consider the tax implications of contributions and withdrawals, which vary across different account types. Making the right choice can lead to significant tax savings.
Common retirement accounts include the Roth IRA, which allows tax-free withdrawals after age 59 1/2 and benefits those expecting to be in a higher tax bracket in retirement. The Traditional IRA may offer immediate tax deductions for those anticipating a lower tax bracket in retirement. Employer-sponsored retirement plans like traditional 401(k)s provide tax-deferred growth on investments until withdrawal in retirement.
To streamline your tax filing process, consider using tax preparation software like TurboTax, H&R Block, or TaxAct. Take advantage of the IRS Free File program if you qualify, allowing you to file federal taxes for free with partners like FreeTaxUSA. Properly filing your taxes is the first step to receiving your tax refund promptly and accurately.
Consider using tax programs for filing your taxes. These programs offer both free options for straightforward returns as well as paid versions that provide support from professionals or additional forms for more complex situations such as investments or self-employment income. You can import your tax documents easily through some programs, saving time by linking to your bank account and investment platforms. Many programs also offer mobile apps that allow you to snap photos of physical tax documents for easy filing. Opting for online payment and filing can speed up the return process compared to traditional paper filing. The IRS allows online payments using various methods like credit cards, debit cards, checks, and direct bank transfers. When using credit cards for payment, ensure that any rewards or benefits you receive outweigh the fees incurred. For intricate tax situations, consider seeking help from a tax professional to potentially save money in the long run. For additional information on maximizing your tax refund, explore FAQs on topics like refund timing and strategies. It’s essential to strike a balance between receiving a refund and adjusting your withholding to avoid financial surprises. If your tax refund is delayed, utilize tools like the “Where’s My Refund?” tool or contact the IRS hotline for updates. Common reasons for delays include errors on returns or additional review requirements for specific credits. Be patient during tax season, as IRS phone lines can be busy.
To enhance their daily and overall well-being, Yahia’s knowledge has been showcased on FinanceBuzz, FX Empire, and EarnForex. Residing in Florida, he harmonizes his passion for finance with activities such as freediving, hiking, and underwater photography. Article revised by Kelly Suzan Waggoner.
