Tax Refunds: Spend, Save, or Invest?

Apr 15, 2022 12:00:00 PM

Doing taxes can be a bit of a headache, but receiving a tax refund makes it all worthwhile! Want some suggestions on how to manage your refund in a way that benefits your overall financial health? Read on for a few ideas on what to do with your unexpected funds.

Pay Off Debt

Saving and spending aren’t the only two options when it comes to tax refunds. Using refund money to pay off existing debt can make a major impact on your finances. Even if you don’t cover your entire student loan or car loan or whatever other debt you’re holding, making any dent in what you owe is a good thing: you’ll pay it off sooner, and spend less money on interest.

Build Credit

A tax refund could be used to put a down payment on a secured credit card. This type of card is available to people who don’t qualify for a traditional credit card, either because their credit score is too low or because their credit history isn’t long enough. A secured credit card requires an initial deposit, which could be a good use of tax refund dollars if building credit is a priority.

Save for Retirement

 It’s never a bad time to start saving for retirement. If you already have an Individual Retirement Account (IRA) or Roth IRA, that could be a good landing spot for an unexpected chunk of change after tax refunds arrive. Just remember that there are annual contribution limits for IRAs—$6,000 per year if you’re under 50, and $7,000 if you’re 50 or older.

Invest in a Tax-efficient Fund

If you’ve reached your IRA contribution limit, or if you’re simply interested in diversifying where your money goes, you could use your tax refund to start or amplify an investment strategy. If you’re concerned about investment income raising your tax bill next year, look for tax-efficient options: exchange traded funds (ETFs), municipal bonds and tax-managed funds are all good bets.

Invest in Yourself

Another way to approach investments with a tax refund is to invest in yourself. That might mean starting a fund for further education, paying for an online course, or putting aside some money for a business venture you think might make a good side hustle. Spending your refund on hobbies or family activities can be an investment too—in your happiness and mental health.

Get Ahead of Maintenance

Have you been procrastinating on costly repairs? Whether it’s home improvement, car fix-ups, or looking after your own healthcare needs, spending a tax refund on much-needed maintenance work means you can avoid higher costs in the future. This option is particularly relevant at a time when car prices are high, so if your auto is in need of some TLC, don’t wait until the problem gets worse!

Start an Emergency Fund

Experts recommend that you set aside enough money to cover three to six months of living expenses. Do some calculations, check what’s already in your savings account, and see if some of your tax refund can go toward building or bulking up a rainy day fund. Another consideration is where you keep it: look for a savings account that offers interest and makes it easy to access your funds if an emergency occurs.

Give to a Good Cause

Making a charitable donation is a great way to spend your tax refund. When you give to a good cause, you’re both paying it forward and reducing your taxable income, assuming you give to a qualifying tax-exempt organization. Be sure to document your donations, and check the IRS’s catalogue of tax-exempt non-profits if you’re unsure what charities qualify.

Tags: Taxes