The first tip when it comes to your tax refund is: Don’t spend it before you get it! There’s no guarantee that you’ll get the amount you expect, so it’s better to wait until after tax day to make your plans.

Investing vs Paying Off Debt

If you aren’t sure whether you should invest your tax refund or use it to pay off debt, all you need to do is take a look at your finances. Do you have high-interest debt on a credit card or a loan? If so, save yourself money in the long run by paying down the principal asap. Your tax refund provides you with the perfect opportunity to put a large sum of money toward your debt so you can reduce how much interest you pay over time. If you don’t have any debt, then investing your return is a good choice.

For more debt consolidation assistance, get in touch with the team of bankruptcy attorneys at Rulon T. Burton. We aim to counsel people on the road to financial recovery, which doesn’t include relying solely on a tax refund to get out of debt.

Investments to Make With Your Tax Refund

Contribute to Your 401(k)

Many employers match 401(k) contributions, so if you have a tax return this year, consider adding it to your 401(k). While it’s tempting to spend the money now, if you invest it in your retirement fund instead, you’re increasing the “income” you can enjoy after you retire. 

Most retirement experts recommend putting between 10-15% of your annual income toward your 401(k). Padding that percentage with your tax return is a smart investment in your future, even if you don’t do it every year. Keep in mind there are caps regarding how much you can contribute:

• Younger than 50 (as of 2022) – Maximum annual contribution of $20,500
• Aged 50+ (as of 2022) – Maximum annual contribution of $27,000

Put It Into Real Estate

If you’re planning to purchase a home or have updates you’d like to do where you currently live, investing your tax return in real estate is a smart idea. While these days you can typically put down any amount for a house purchase, 20% is a common recommendation. If you want to use your return to increase your current home’s value, some of the best improvements to make for a return on your investment include:

• Bathroom
• Kitchen
• Exteriors – windows, siding, landscaping

Put It in a 529 Plan

No matter what type of education the next generation of students wants to pursue, it’s going to be expensive. So, put your tax refund toward an education fund that allows your savings to go further.

There are federal as well as state income tax benefits for contributing to a 529; when the recipient receives their 529 funds and applies them to college tuition, for example, it’s distributed tax-free.

Since 529 funds can only be used for education, you (or the recipient) won’t be tempted to spend it on other things unless you want to pay a fee. The funds can be used for expenses related to education, such as room and board, books, or other supplies. However, if you want to make a withdrawal for a non-qualified purpose, you are subject to income tax and a 10% penalty.

Another benefit of this education account is that routine contributions can be automated, and the maximum amount is pretty high (there’s no annual contribution limit, but the aggregate limit can range from $235,000 to $529,000). This makes it convenient to not only add one-time contributions such as a tax refund but to set up recurring contributions based on your budget.

Did you know a 529 plan does not have a big impact on future financial aid eligibility? While the account will be taken into consideration, the funds will not be counted as income for aid such as Free Application for Federal Student Aid (FAFSA). Also, if a student earns a scholarship for some or all of their educational expenses, arrangements can be made for withdrawal from the 529 account without penalty (and the money can be used for other expenses).

Invest In Your Own Savings

You don’t have to get fancy when it comes to saving money. If all you’d like to do is put your tax refund in your regular savings account, it’s a smart move. However, if you’re prone to the occasional over-spending, you may consider putting your refund in a less accessible savings account such as a certificate of deposit account (CD).

A CD is for deposits made until a specified end date. All deposits in a CD earn interest until the CD reaches maturity (the end date). You can routinely contribute to it, but you are unable to withdraw any funds until the designated end date. If you try to withdraw from it prematurely, you’re subject to penalty fees. 

There are different types of CDs, so check with your financial institution and talk with an advisor to find one that works best for you. Our SLC Chapter 13 attorneys have more suggestions on prioritizing your savings in this blog article HERE.