How Should You Spend a Tax Refund?

Are you getting a tax refund this year? Plenty of people are. Much like trivia, running through the IRS data is always interesting… at least for those who love diving into the minutiae. So here are some tax facts for the 2022 season:

• Through March 17, 2023, the IRS has processed nearly 54 million refunds.
• So far, the IRS has sent out refund checks totaling $158 billion. The average tax refund is with the average refund just a tad under $3,000. That’s a good chunk of change for the average person.

But, getting back to the topic, how should you “spend” your tax refund? Maybe a better question is: how could you best invest the cash?

Not everyone will receive a refund this tax season, but these tips can be used when receiving any gift, bonus or unexpected cash windfall.

7 Smart Ways to Invest Your Tax Refund

1. Do you have a rainy-day fund? Whether it’s a home repair, auto repair, a layoff or unexpected bill, having cash set aside can ease a financial burden. We recommend three to six months of readily accessible savings in the event of an emergency. If you don’t have a rainy-day fund, don’t procrastinate; get started today.

2. Get out of debt. Pay down or pay off high-rate credit cards or unsecured loans. You might start off with the card with the lowest balance first. Wiping the slate clean on a card or cards is a big psychological win and will encourage you to stay in the battle until you are out of debt.

3. Tackle your student loans. If you have an emergency fund and credit card debts are low, consider tackling your student loans. Sure, they helped you get through college, but they are a burden hanging over your financial future.

4. We reap what we sow. If you don’t sow into a retirement plan, there will be no harvest come retirement. If you take the hypothetical $3,263 tax refund and stash it in a Roth IRA, you’ll have $32,834 in 30 years, assuming an 8% annual return. Plus, you’ll pay no federal income tax when you take a qualified withdrawal from a Roth IRA.

At 10%, you’ll have $56,937, and at 6%, you’ll have $18,741. Of course, returns aren’t guaranteed and may vary, but trading one’s natural inclination for instant gratification for a future payoff can pay you a handsome reward.

5. Invest in the future of your child, grandchild or yourself. There are various options, and we can point you in the right direction to help get your started. 

You might consider an education savings account of a 529 plan for your kids. While you won’t get a tax deduction for contributions into the accounts, these vehicles allow you to grow the money tax-free, and they can be withdrawn for qualified expenses without a tax liability.

Have you decided that you would like to invest in yourself? Certifications and college classes can help sharpen your skills. Even if you are not career-oriented, investing in your hobbies can bring added enjoyment.

6. Gifting your refund. You may decide that you don’t need the money, and would rather give it to a family member or to charity. What puts a smile on your face? That may be the appropriate strategy for your refund.

7. Have some fun. Whether it’s a nearby weekend trip, a day trip to the spa, or that expensive restaurant you have always wanted to try, it’s OK to take care of yourself.

These suggestions are just food for thought. But be strategic and think long-term. A lack of planning and impulsive decisions can be costly. And remember, we are always here to assist you.