Here's How To Maximize Your Tax Refund
You have now received your refund check. Perhaps you have already thought of a way to use it. Still, it's time to make a firm decision about what to do with the funds. This reimbursement differs from your usual salary. It's a one-time bonus that's frequently the largest sum of money you receive each year. As of March 1, 2024, the average refund cheque from the IRS for this year is approximately $3,182. Although receiving the money is pleasant, it's not always the wisest financial decision to request a refund.
Considering your options
According to certified financial adviser Randy Bruns, "It means you paid more taxes than you needed to throughout the year, essentially giving the IRS a loan without any interest." However, Bruns acknowledges, "From an emotional standpoint, practically everyone enjoys receiving a tax refund. With inflation going up and credit card debt climbing, if you can choose what to do with your refund, consider yourself lucky."
"For a lot of Americans, they've already mentally spent that refund before it even arrives," noted Jeff Jones, CEO of H&R Block. "They know they have bills to pay, and that's the top priority."
Save, invest, or both?
Got your refund back, and there aren't any urgent bills? Now it's up to you: Save it? How? Invest it? Or a little bit of both?
Examining interest rates is something some financial experts advise. Assume you have a savings account with 5% interest and a huge credit card debt with 20% interest. It makes sense to pay off high-interest debt before concentrating on savings. Financial counselor Laura Mattia suggests, "Start by paying off high-interest debt, like credit card balances or personal loans. Then build an emergency fund for unexpected expenses."
Save some money even if paying off debt is your top objective, advises planner Liz Windisch. "Very few have enough emergency savings or maxed-out retirement savings."Experts advise giving priority to keeping your return. "Invest it, in yourself or the markets," suggests Catherine Valega, a financial planner. "Don't just spend it."
Maximizing your savings
Saving rates have gone down, but interest rates on various savings products are now at their highest in years. "There's never been a better time to save considering the current interest rates and the range of options available," said Arijit Roy, from US Bank. Financial advisers generally recommend building an emergency fund to cover three to six months of expenses or even more.
"Begin by padding your emergency fund if you haven't already saved six to 12 months' worth of expenses," advises Valega. That's a significant amount, and not everyone manages to save that much. But it's a worthwhile goal.
If you opt to save, think outside the box. Certificates of deposit (CDs), money market funds, and high-yield savings accounts all offer competitive rates. "Leaving your refund in your checking account is probably the worst thing you can do," cautions Windisch. High-yield savings accounts are now a reality, with banks offering accounts that pay substantial interest, often around 4% to 5%.
Money market funds have the potential to yield significant returns, and CD rates are also rising. After you have enough money saved for emergencies, think about increasing your retirement savings. This entails trying to save the current 401(k) contribution cap of $23,000 by the year 2024. You can add $7,500 to your contribution if you are 50 or older. The yearly cap for an individual retirement account (IRA), which you administer yourself, is now $7,000, or $8,000 for individuals aged 50 and over 50.
Smart spending
Even if you can't reach the maximum contribution, "think about using the refund to kickstart your retirement savings," suggests Mattia. If you decide to spend your refund, do so wisely. Once high-interest debt is paid off and your savings are secure, consider using the money for important projects you've been postponing due to cost reasons: Fix your roof, repair your car, or invest in further education to enhance your earning potential. "Using the refund for necessary home repairs or education are smart investments in your financial security," says Mattia.
