The tax filing deadline is just around the corner, but for Americans who are expecting a return, or who have already received one, they may be wondering what to do with the money. The average refund is estimated to be just over $3,000, so for those who want to maximize their refund, we have outlined impactful and immediate recommendations. See below:
College savings. Establish or add to a 529 plan for children. Using a tax refund is a great way to jump start this account and/or continue financing this large expense for later in life.
Open a custodial account for a child. If you already have enough saved for college, since that effort should be first and foremost, use a tax refund to educate children on investing. Buy shares of a company based on their interests – for example purchase shares of video game maker Electronic Arts if they are into gaming – and teach them the concept of owning a real business and long-term investing philosophies.
No kids? Invest in yourself. Check to see if you are eligible to invest in a traditional or Roth IRA. This will allow you to bolster retirement savings efforts.
Pay off credit card debt. According to a recent Bankrate.com survey, 28 percent of Americans plan to pay down debt using part or all of their refund. Credit cards usually carry higher rates than other debt, so this is best to pay off first.
Add to emergency savings pool. We generally recommend saving 6-18 months of income in an emergency account. If that fund is low, tax refunds are a good way to replenish or build this account.
Charitable giving. With extra funds, consider donating to a charity or cause that is meaningful to you and your family.
Home repairs. Invest in your home and see to any maintenance that needs to take place (landscaping, new AC unit, etc.). Also, tax season comes at an opportune time in that it coincides with spring cleaning. Check out the infographic that my colleague Bill Engel created for tips on spring cleaning your finances.
Life insurance updates. For filers who receive a large refund (few thousand dollars), it may be worthwhile to review insurance policies, especially life insurance, to see if updates need to be made or if you can fill any holes in planning. For example, buy a term policy, or bump up existing coverage.
Time to splurge? If you have the urge to use a refund on something “fun,” try to split the refund so that half goes toward that purchase, and the other half goes toward something that financially benefits you and/or your family (529 plan, Roth IRA, etc.). The best thing we see when it comes to “splurging” is using tax refunds toward vacation planning – opting to pre-fund upcoming travel efforts or saving the money in a separate account to use for lodging, airfare, etc.
Have a plan. No matter how you decide to use a refund, the biggest mistake we see is depositing the refund check into an account, and then assuming you will use it at a later time. As soon as you file and know the amount you can expect, pre-plan how you will use the funds. This way you can execute and accomplish your financial goals properly.