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12 Smart Things to Do with Your Tax Refund

Updated for Tax Year 2017


OVERVIEW

Saving money is kind of like eating a healthy diet. You know you should do more of it, but it’s hard to resist making spur-of-the-moment choices that make you happier now but worse off later. A tax refund marks a great chance to set yourself in a better position for the future. If you’re getting a windfall from the IRS, here are a dozen great ways to make sure your money continues to work for you.


1. Create an emergency fund

Saving for a rainy day

Many Americans don’t have an adequate savings account accessible in case of a sudden financial need. A lack of savings leaves you vulnerable to a job loss, medical emergency or major repair and can force you to seek out short-term loans at high interest rates or carry credit card balances for an extended period. Using your refund to start or augment an emergency fund could leave you breathing easier should one of those events arise.

2. Send it to savings

Man using an ATM

The IRS allows you to split up your refund in up to three accounts via direct deposit. That’s a perfect opportunity to stash some funds in a savings account that’s inconvenient for you to access, assuring that the money stays out of sight and out of mind until you really need it. If you maintain an account at a bank near a former residence without a branch nearby, augmenting your balance there can keep it safe from impulse buys.

3. Pay off debt

Woman using a credit card on a laptop

If you are carrying a credit card balance, consider using your tax refund to pay that off. It doesn’t make much financial sense to put the IRS check for $3,000 in a fund yielding 1% interest and maintain a $3,000 balance on a credit card account charging 18% interest. Going this route allows you to put more money in the bank every month once those minimum payments vanish from your list of bills.

4. Fund your retirement

Senior couple toasting at dinner

What better way to sock money away for retirement than by using funds that aren’t a part of your paycheck anyway? You can use the funds to purchase or augment a Roth or traditional IRA, which sequesters your money away for when you’re no longer on the job. At that point, you’ll probably be grateful that you had the foresight to save for retirement rather than spend it on something you’d have long since forgotten about.

5. Look to the future

Mother playing with her baby

You're not the only one who needs to prepare for retirement. Your kids can also start to plan now. Given the power of compounded interest, starting young is the best approach for well-funded golden years. Your child is allowed to contribute up to $5,500 for an IRA as long as she has that much earned income. Moreover, you can be the one funding the account as long as she’s the one who earned the money—a win-win for any kid.

6. Seed the college fund

Little girl raising her hand in class

If you have children or grandchildren, you’d be doing them a huge favor by saving your refund in a college fund for their benefit. Setting up a 529 plan can help them afford a higher education in an era where rising costs leave many saddled with massive debt along with the diploma. In some cases, you may even be able to pick up a deduction on your state income taxes for your trouble.

7. Invest in the stock market

Man reading the newspaper

Historically, the stock market has offered greater return on investment than savings accounts, CDs or bonds. While its fluctuations make it a risky choice for money you’ll likely need in the coming months, the long-term outlook makes it a better option if you don’t have an immediate financial need. Pick individual stocks or select an index fund that moves up and down along with the market.

8. Kickstart your career

Young professional on the phone

A tax refund can be the tool you need to take your career prospects to the next level. If you're noticing that those co-workers getting promoted all seem to have programming skills or experience working with databases, the refund check can go toward tuition for courses in those subjects. By taking advantage of the Lifetime Learning credit, you may be able to use the costs of the course to take money off your taxes again next year.

9. Prepay your mortgage

Home in a bubble

Making extra payments on your mortgage can be a great way to save money over the long term. Because so much of your payment on a long-term note goes to pay off the interest, reducing the principal can have an exponential effect over the life of the loan. Even an extra payment or two now can make a big difference in your future obligation to the bank.

10. Start a business

Female entrepreneur

You don't have to quit your current job to start your own business. If you've always wanted to use your knack for finding treasures at yard sales into a business selling the finds online, or you want to take advantage of your woodworking talent to craft and sell handmade furniture, a tax refund can provide the seed money to build up inventory, design a website or online store, or otherwise allow you to turn a hobby into a money-making enterprise.

11. Make home improvements

Couple choosing a color palette

If you live in an older home, spending some of that refund around the house can lower energy bills. Replacing old windows can improve the efficiency of your air conditioning in the summer and reduce your electric bill. Old appliances can be replaced by models that use less energy. If your kitchen or bathroom is out of date a remodeling project can improve the functionality of your house now and also make it more attractive when you decide to sell.

12. Buy life insurance

Jumping off a cliff

Life insurance can be easy to overlook, particularly for younger workers confident that they have plenty of time to worry about that. But particularly for those who are married with families, a term life policy can provide protection for loved ones at a relatively low cost. For the cost of a few hundred dollars, your tax refund can allow your family to maintain its standard of living if the unthinkable happens.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


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