You can maximize your tax refund in several ways — from paying off high-interest debt to investing in a business or saving for retirement. One or more of these options could be the perfect fit for you.
A tax refund is a great opportunity to set yourself up for the future. If you're expecting a windfall from the IRS this year, one or more of these 7 smart options for investing your tax refund could be the perfect fit for you.
1. Pay off high-interest debt
Has a high-interest credit card balance been a thorn in your side? Resist temptation to book a vacation with your refund and tackle that debt instead. Start with debts with the highest interest rates; eliminating these will save you the most money in the long run. If you don't have any credit card debt, use your tax refund to reduce your car or student loan debt.
2. Up your 401(k) contributions
Put your tax refund toward everyday expenses, while increasing your 401(k) contributions. If you're only putting in 3% of your paycheck, but your company matches up to 6%, you can double the pre-tax income you're investing to maximize retirement funds.
Your paychecks will be slightly lower but you can use your refund to make up the difference while investing in your retirement and lowering your taxable income.
3. Increase a home down payment or resale value
If you've been saving for a home, use your refund to increase your down payment to avoid costly private mortgage insurance payments and also to reduce the overall amount of your mortgage.
If you already own your home and have been waiting to replace a leaky pipe or start a much-needed home improvement project, getting a tax refund might be a good time to make your home more functional while increasing its resale value.
4. Make an investment
Perhaps you want to invest in real estate, a tech start-up or a stock you believe is about to soar, but you've been waiting for a little extra cushion of cash. If you've done your research and are itching to take a calculated risk, utilize your tax refund before dipping into your checking or savings accounts.
5. Make investments that save time and money
Dedicate part of your tax refund to a product or service that can save you time, money or a combination of the two. An example is finding a meal delivery service that's cheaper than grocery shopping and can help make serving dinner quicker and easier on you during your busy workweek.
6. Open a credit card account with benefits
As long as you're debt free and pay off your credit card balances every month, you might want to invest in a card with desirable perks, especially if your current credit cards don't offer any benefits.
Some cards may require an annual fee, but they often offer substantial travel and lifestyle rewards. The right credit card should save you more than—or provide services that far exceed—the cost of maintaining the account.
7. Give a tax-free annual gift
If you have a well-established financial portfolio and are near retirement age, you may want to consider gifting excess funds, such as a large refund, every year. The IRS sets an annual limit ($15,000 per recipient, as of 2020) on the gifts individuals are able to transfer to others, including family members, without filing a gift tax return.