While tax filing is never that exciting, knowing you are getting a tax refund or are anticipating one, certainly can be for you.
Yet, many people rush to take that lump sum during tax season and immediately spend it on random material items. Whether that is a fancy vacation, updating technology, buying new clothes, etc.
While that is your prerogative to do so, there are much better ways to spend your returned tax money.
Instead, one of the smartest money moves you can make with your federal tax refund is to save or invest the money.
Putting that money to work for you now can bring a stronger ROI for you in the near future.
That said, below are nine examples of how you can invest your tax refund this year if you are getting one.
1. Invest Your Tax Refund in Your Savings for Emergencies
Instead of thinking of how you can spend your refund first, think of how it can help your savings.
America struggles with being financially prepared for an emergency, in fact it’s not that pretty at all:
“An estimated 57% of Americans have less than $1,000 in savings, which means they’re nowhere close to having enough cash for a true emergency fund. And 39% of adults have no money in the bank whatsoever.” (Source)
While you may not get a huge refund every year, take a look at the average tax refund by state. (This data will change every year, especially with any new tax laws in place)
Imagine what that or even half that refund money can do for your savings. Plus, you no longer would belong to those ugly stats from above.
One of the best things you can do is add any refund to a high-yield savings account. There are a few options to choose from and many are online banks, but I like CIT Banks Savings Builder Account.
2. Make Extra High-Interest Debt Payment
If you are like me, you may have some student debt or even credit card debt with some high-interest. (Fortunately, I become completely debt free in December 2019).
For awhile, I was only able to make the minimum payment each month on my student debt. Nut during tax refund season, I was putting a little extra towards it.
This not only helps cut your down your debt a little faster, but can save you on some yearly interest.
There were a few refunds that I got that were less than $400, which really isn’t a lot. But, that was enough to be an extra payment for a loan. Every little bit can help.
3. Invest for Your Retirement
Whether you plan on retiring early or not, this is one no-brainer investment for your tax refund this year (and every year, even).
If you have a workplace 401k, put the extra towards your investment strategy. Or if you have your own IRA or Roth IRA, this can be used to help you max out your contribution.
Either way, this extra few hundred or $1,000+ can really elevate your retirement savings money, especially when compound interest is involved. You’d be amazed at what these retirement investments can lead to 5, 10, or 25+ years down the road.
I usually put most of my tax refund I get into my Roth IRA, to get a jump start on the new years’ contributions. Lately I have not got as much of a return because I’ve adjusted my W2 withholding. Personal choice.
4. Start Investing In A 529 Plan
If you have started a family or have kids getting closer to starting school, a 529 plan can be a great way to invest for their future.
A 529 plan is a plan that can help you save for college and offers tax and financial aid benefits. 529 plans may can also be used to save and invest for K-12 tuition in addition to college costs.
There are two types of 529 plans: college savings plans and prepaid tuition plans. (Source).
There are also some tax benefits and some guidelines for investing in a 529 plan, but it can certainly help prepare you for future education costs. I’d check out the source I linked above if you are looking for more information.
5. Invest in Your Side Hustle
If you are starting your own business or another side hustle, investing your tax refund in your project can be wise.
Not every side hustle will have some initial start-up costs, but most might have a few expenses (especially if filing for LLC, building a website, buying products, etc.).
While not all these things are super expensive, your tax refund check can be just the personal cash you need to get started.
Additionally, it can be used as a fund for your side hustle where future tax refunds and extra cash can go.
6. Fund Your HSA Account
That is to say, if you have an HSA account. If you don’t currently have one, feel free to skip to the next one down.
However, if you have a Health Savings Account (HSA) or looking to open one, you may want to invest your tax refund money there.
Essentially, if you have room to contribute and want to ensure you are covered for future medical expenses, then this might an option for you.
But an HSA account is good beyond coverage for medical or healthcare costs, it has some major tax benefits too.
How it works: Pre-tax money goes in (or your own contribution that is deductible), you owe no taxes on growth, and you owe no taxes on withdrawal for medical expenses.
So besides your potential refund you add in, you can get more tax benefits in future years too. Boom!
7. Invest In Other Assets (Besides Stock Market)
Investing in the stock market is of course a smart decision for retirement and your other financial goals.
Yet, investing in stocks and bonds is only one area to put your money to work in. There are many other avenues to put your tax refund towards.
It’s important for diversification and for your money to have numerous options for growth.
Some examples include alternative investments like real estate (crowdfunding, rental properties, rehabs, etc.), investing in art, investing in commodities (silver, gold, copper, etc.), P2P loans (Peer-to-Peer), etc.
If you are looking to mix up your investment income, check out some of the below options:
- Fundrise (Invest in Real Estate with $500)
- Groundfloor (Invest in Single-Family Real Estate with $10)
- Masterworks (Invest in Art)
8. Invest In Yourself
While investing in your business or side hustle could fall under this, I felt this needs to be separated.
Investing your tax refund in yourself means so much more than just your side hustle.
The way you make money, how your career or side hustle grows, and your expertise are all on you.
You can use your tax refund on further education (Like reading personal finance books), online courses, resources to learn more like going to conferences, teaching seminars, etc.
The ROI on investing in yourself can be huge, especially for your financial well-being. Learn more as to why investing in yourself first is the best asset.
9. Use Your Tax Refund to Invest in O
Use your extra money from your tax refund to invest in others, like donating it to a cause you believe in. Not only are you benefiting others from those charities, but you get a tax-break on your contribution too.
Of course, a tax break should not be your only charitable motivation, but it is an added benefit along with helping others.
You can also invest in others outside of charities, maybe that’s a family member, close friends, or just giving good karma out to others. What you do here is ultimately up to you!
Bonus: Pay for Something You Need
Although I think investing your tax refund in some of the above nine things are important, sometimes you need to use the money on something you need.
This can include an expensive car repair, maybe a home repair, or something like a new appliance to replace a broken one, etc.
These types of items can be beneficial for your everyday life and family, which a tax refund can also be used for.
Spending Tax Refund
Now that you read my spiel on investing your refund, what if you rather start spending your tax refund instead? Honestly, that is your prerogative and it’s not my business or anyone else’s as to what you do with it.
Sometimes you do just need to treat yourself and spend money on YOU! I’ve never felt that was a major problem.
However, if you have massive debt, have not done much to improve your finances, or lacking behind in saving or investing — I would recommend to sleep on any major purchase first and think about how this extra can help you out.
But ultimately, it’s your money and your decision. But hopefully the above gave you some simple ideas of what to do with any money you get after filing your tax return.
Ready to File Your Tax Returns?
Once you get your tax returns, it’s going to be time to prep and then file your taxes.
Personally, I have a family friend who is a CPA and she handles all my taxes as it gets a bit complicated.
With student loan debt papers, various investments, my W2 job, a side business, and tax laws always changing — she’s been my go-to. Plus she know’s how to find the best tax deductions!
However, what you choose to do with your tax returns is up to you. As your taxes may be less complicated and something you prefer to do yourself.
Here are a few options for you:
- TurboTax – You can use the free version for simple tax returns or the paid versions for more complicated stuff. This is for those DIY tax people.
- TaxSlayer – Get the maximum out of your refund and file online with TaxSlayer. Students are free and they have the lowest fees.
- Liberty Tax – You can file in person at their locations or file online with fairly quickly. Free consultations, maximum refund guaranteed, assistance on any tax issues.
- Local CPA – If you prefer to go to someone local to handle your tax returns, there will be plenty of options near you. Just note, these may cost you much higher than the above services.