The average income tax refund in 2016 was $2,860. That’s a pretty sizable chunk of change! You can probably think of at least a handful of ways you might spend that money. GOBankingRates conducted a survey asking Americans what their plans are for their tax refunds. The most common answer (40 percent) among respondents who reported they expect to receive tax back was music to our ears: build their savings account! At the other end of the spectrum, five percent of respondents said they plan to splurge on a purchase, while another five percent say they would use their refunds on a major purchase, like a home or car. Here are five smart ways to use the money Uncle Sam will send back.
Invest in your IRA
The farther away you are from retirement, the more difficult it can be to plan for it. It just doesn’t seem “real” — but it is! If you have an IRA, good for you! If you don’t have an IRA, now is as good a time as any to look into opening one up! There are two options: traditional and Roth (you can find a basic breakdown here). This can be an especially smart way to consider investing your tax refund: your contributions to a Traditional IRA may be tax deductible for the year you make the contribution*, so this year’s refund will ultimately help you increase the tax refund you’ll get next year.
Education: past and future
Whether you fall into the category of needing to pay off student loans, save for a child’s education, or both, your tax return can be put to good use. Take this opportunity to catch up on, or get a head of your student loans to give yourself a little breathing room moving forward. If this is a manageable area, especially if your interest rates are low, planning for a child’s future education might be a better option. NVE offers the Coverdell Education Savings Account (ESA), a deposit account established for the qualified education expenses of a designated beneficiary. The maximum annual contribution is $2,000 and distributions used for the designated beneficiary’s qualified education expenses are tax free.
Chip away at credit card debt
One of the first things most financial experts recommend tackling is credit card debt. There are different schools of thought with regard to the strategy behind the order of payment when faced with outstanding balances on multiple credit cards. Talk to a trusted financial advisor to help you determine what approach will work best for you.
Keep your emergency fund full
If we sound like a broken record when it comes to reiterating the importance of setting up and maintaining an emergency fund, it’s for good reason. When you find yourself in a situation — especially a scary or emotional one — where you need to access cash immediately, the last thing you want to worry about is how you’re going to pay for it, or whether it’s going to put you in debt. If you have reservations about your will power, you may want to open a separate savings account specifically for this purpose.
Find a healthy balance
There’s no rule saying you have to put 100 percent of your refund toward any one thing. Take a good look at your financial status, including goals, debt, needs, and wants. Figure out what’s going to help improve your standing, and if you can afford it, reward yourself by putting a small portion toward a moderate splurge.
Keeping current on tax updates and working with a tax preparer can help to maximize your refund. To make that money grow even more, it’s wise to deposit it into an interest-bearing account, such as savings, money market, or certificate of deposit (CD). Contact your tax advisor to determine eligibility and tax deductibility for all aforementioned options.
* Traditional IRA contributions may be tax deductible for the year you make the contribution, depending on income, filing status, and whether you are covered by an employer retirement plan.