Tax refund for us is a big expectation while filing our taxes at the end of the tax year. Whatever we can pull back from the vaults of IRS, makes us a bit happy.
But only a few of us actually know how to put the tax refund money to some good use.
First, you need to understand that the tax return doesn’t grow on interests. So whatever amount you get back is a part of your past year’s annual income, and it is rightfully yours.
Today's question is logical for many of us. How should we use our tax refund? Should we put it toward car loan payments and other debt obligations, or punch it to retirement savings?
Without any further ado, let's revise the various options, we have, to sensibly utilize our tax refunds.
Tax refunds and debt payments:
In personal finances, it is always advised to avoid debts and live life within your means. By living on debts you build more bindings. So it’s better to clear the amounts you owe to other people first.
Now tax refund is the money that you actually earned last year. This money you could have used to make extra debt payments, and probably you would have cleared your debts by now, if you did so.
Hence the ball is in your court. If you think that the tax refund is not much to help you build good savings or anything like that, then do a few extra payments for your debts.
As per record, there are many incidents where consumers really benefited from tax refunds by paying off debts.
So why take chances? Straightaway clear your debt liabilities first whenever you get any extra cash. Later you can think of other options.
Tax refund and mortgage/car loans:
Many debate that whenever you get hold of your tax refund, use it for loan payments. But I would first ask whether or not the loan payments are really a burden for you. Also, if making extra debt payments will do any good for your loan debts.
Usually, mortgage loan or auto loan is a long-term liability, that is already designed to help you out with your loan payments.
So, until and unless the refund is huge, and it will be able to slash down quite a significant portion of your loan amount, you should not use it for clearing secured loans.
Tax refunds and savings:
If you have no such debts or liabilities to look up to with your tax refund, then plan your savings with that amount.
You always have the option to put your tax refund to do extra savings. Again if the refund amount is really huge, then you can open a separate savings account by using it as the base amount.
Also, you can go for a certificate of deposit, and keep it away for some future use, while the amount grows over time.
Tax refund and retirement:
As savings is a pretty big option for many consumers who are getting back a hefty tax refund, they choose to increase their investment in retirement accounts.
You can very well imagine that retirement life can become financially hard to cope up with.
So this is your chance to build a level high on your retirement accounts.
You can also open up your separate Individual Retirement Account (IRA) alongside your employer-sponsored retirement plans.
My suggestion is to invest your money into a Roth IRA as it has way more advantage over taxes and penalties than other retirement plans.
The amount you put into your Roth IRA is pre-taxed, but you can withdraw amounts from it anytime you want, without paying any penalties or taxes on your withdrawals.
Tax refund and mutual funds:
Another option that’s open to you, is investing in mutual funds.
There are many people, who have no room to play with the tax refund, as they receive this amount at irrelevant and odd times.
So they plan out mutual funds, stocks, and bonds with that amount. But to keep in mind that your tax refund amount must at least be decent to experiment with. Else it will be a total loss, and you might feel that it would have been better to party with this amount, rather than investing it in wrong fields!
That was all I had to discuss about tax refunds. But keep one thing in mind, if you already have tax debts, then your chances of getting tax refunds will become very thin. So for those who are expecting a tax refund this year with the current filing season, first take a look and see whether or not you have tax debts.
That’s for your own good!
