7 Money-Smart Things to Do With Your Tax Refund
Some people dread the April 15 tax deadline while others look forward to it - once they figure out they have a tax refund coming, that is.
If you got good news when you filled out your tax return, it's time to start thinking about what to do with the tax refund money you'll receive.
Sure, there's a never-ending list of things you could spend it on; but the people who succeed at building wealth over time have a knack for parlaying the money they get into even more money.
If you want more than a short-lived spending spree or vacation from your tax refund, think about doing something more transformational with it - something that will give that tax refund even more value in the future than it has today.
Smart Things to do with Your Tax Refund
Here are seven money-smart things that could transform this year's tax refund into something of even greater value in the future:
- Make catch-up contributions to your retirement fund
If you're like most Americans, you are probably a little behind when it comes to saving for retirement. The closer you are to retirement age, the more critical this situation is. Fortunately, the IRS offers an extra tax break to people aged 50 or over to help them catch up on saving for retirement.
This extra tax break comes in the form of catch-up contributions to retirement plans like 401(k) plans or IRAs. For 2020, people 50 or over can defer an extra $6,500 into a 401(k) or 403(b) plan. For traditional and Roth IRAs, an extra $1,000 catch-up contribution is allowed.
Making a catch-up contribution will help make more of your refund by allowing it to grow for your future benefit, and by giving you a break on your 2020 taxes. Who knows, that might just start you on the path toward getting another refund this time next year.
- Pay down high-cost debt
In case you hadn't noticed, credit card rates are rising. That makes this an especially good time to pay down any balances you've been carrying on your credit cards.
Putting your refund toward paying down high-cost debt is great value for your money because the money you pay off now will reduce the amount of interest charges you are assessed in future months. It could even improve your credit score, which might reduce the interest rates you are charged in the future.
- Beef up your emergency fund
Not only can having an emergency fund savings account to cover unexpected expenses or loss of income bring you peace of mind, but it could also save you money should a financial emergency occur. Rather than having to resort to expensive credit card debt to pay the bills in case of an emergency, you can simply dip into your emergency fund to cover them.
This can help make an emergency more affordable; but even if an emergency doesn't occur, you can still profit by having your emergency fund steadily earning interest in one of the more competitive banks.
- Make an extra mortgage payment
Making an extra mortgage payment is a step toward paying off your mortgage sooner - and that reduces the amount of time for which you'll be paying interest.
If putting your tax refund toward an extra mortgage payment becomes the start of a habit of regularly putting any extra cash toward your mortgage, the savings will magnify further still.
- Jump-start college savings
The more you can save up for college rather than relying on student loans, the cheaper college costs will be in the long run. Plus, 529 college savings plans allow any money you invest in them to grow tax-free, which would further magnify the value of your refund.
- Invest in energy-efficient home improvements
Replacing inefficient appliances, upgrading drafty windows and doors, or improving your insulation are all investments in your home that could pay off with cheaper energy bills every month for many years to come.
- Upgrade your job skills
Do you lack a degree or training that would allow you to qualify for a better-paying job? Are you concerned that outdated skills may be putting your job at risk? If so, using your refund to finance education that would address these issues is an investment in yourself that could pay off in the form of improved earning power in the years ahead.
Part of you might be saying that you'd rather do something fun with the money.
So split the difference. Take some of your tax refund and splurge on something you can enjoy now, but take the remainder (ideally, the bulk of it) and put it toward one or more of the purposes listed above. That way, you can indulge both your present and your future.