If you are one of the many Americans who got a significant refund after filing this year, you might be wondering how you should invest your tax refund.
1. Stash it in a savings account or emergency fund.
While saving may not be the most exciting option, it’s always good to have some cash on hand in case you need it.
One good option is to invest in a health savings account (HSA). HSAs are a tax-free way to save for medical expenses like copays, prescriptions, or even COVID-19 tests. HSA funds are an excellent option for savings because you do not have to use the funds in a calendar year.
Many personal finance experts tend to recommend saving three to six months of expenses as an emergency fund. An emergency fund protects you and your family against unforeseen situations such as job loss, sickness, or a hefty repair bill. How much you should save depends on your family’s financial circumstances, cost of living, and risk tolerance.
But with inflation the way it is right now, leaving a large chunk of cash to sit in the bank doesn’t have the same appeal to many of us. With that in mind, it might be a good idea to consider a high-yield savings account or a certificate of deposit (CD). These savings accounts will have a greater APY (annual percentage yield) and allow your money to grow a bit more than it would in a regular savings or checking account.
2. Pay down high-interest loans or credit card debt.
Do you have any high-interest debt? If so, consider putting your tax refund toward paying that debt off faster.
If you have multiple debts, a good rule of thumb is to pay off the debt with the highest interest rate — this will save you the most money in the long run. For most people, high-interest debt can include credit card debt, certain student loans, or a car loan.
3. Boost your retirement nest egg.
Another good idea is to pay your future self by putting your tax refund toward retirement savings, like a traditional IRA or Roth IRA. This may even earn you a tax break next year.
Don’t forget about contribution limits, though! If you exceed the annual IRA contribution limit, you may have to pay double the taxes. You have until the tax filing deadline to make contributions for that tax year.
Don’t feel left out if you only have a 401(k) through your employer. Though you can’t add outside money to your 401(k), you can opt instead to put your tax refund toward everyday expenses and increase your 401(k) contributions.
4. Expand (or add to) your investment portfolio.
If you want your tax refund money to make you money in the long run, you can always invest it.
Investing in stocks or crypto might be an attractive option if it fits your risk tolerance. If you’d like something with lower volatility, bonds might be a good option. You can even invest in tangible items like gold coins if that sounds like something you’d be interested in.
Investing comes with some additional tax considerations like reporting capital gains or interest. To help you out with this, we have several calculators you can use to estimate how your investments will affect your taxes. Check out our bitcoin tax calculator.
5. Invest in education.
If you have children, nieces, nephews, or any child in your life in need of college savings, 529 plans are a great way to save for higher education expenses.
Qualifying education expenses covered by 529 plans include college tuition and K-12 public, private, or religious school tuition. You can also put the money toward books or room and board.
The best part? The funds are tax-free as long as the 529 beneficiary spends the money on qualified education expenses!
If a 529 plan isn’t for you, don’t fret. There are several ways to save for college, and they all have different tax benefits.
6. Give a tax-free gift.
Maybe you are in a great place financially and want to spend your tax refund on someone else. In this case, gifting is another great way to spend that refund money. In 2022, you can gift up to $16,000 without paying taxes on your gift. You can gift even more than that if your total gifting falls under the IRS’s lifetime exclusion, which is in the millions.
If you do happen to gift more than $16,000 this year, take note that you will need to report it by filing a gift tax return next year using Form 709.
Multiple smart ways to invest your tax refund
If you don’t need your tax refund money for any urgent needs, consider one of these strategies to help your financial situation in the long run (or someone else’s).
Were you happy with your refund amount this year? If you’d like to learn how to increase or decrease your tax refund, our Refund Booster1 is here to help.
1Refund Booster may not work for everyone or in all circumstances and by itself doesn’t constitute legal or tax advice. Your personal tax situation may vary.
This article is for informational purposes only and not legal or financial advice.
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