Tax season has already started, despite the delay of the government shut-down.
If you are like most taxpayers, that anticipated refund is already spent. However, you might want to give serious consideration to some options. The average refund on 2017 returns paid in 2018 was $2,825. Financial advisors are quick to offer suggestions that take into consideration your greatest needs, as well as your financial goals.
How you spend your refunds depend on your priorities, so don’t make the mistake of acting impulsively and foolishly.
- Build emergency savings. Most Americans are not prepared to meet an
emergency. Many Americans don’t even have enough savings to cover a $400 emergency expense, according to the Federal Reserve.
A goal should be to have at least three to six months of expenses in your rainy day account, in order to be prepared for that emergency.
- Reduce debt. I am always amazed to hear how much debt some consumers have. The logical approach is not to buy it if you can’t
comfortably pay for it. Increasing interest rates can make such a burden grow beyond control. The average rate was 14.14% as of January 9, 2019. You would be much better off with an investment earning that much, instead of paying that much on a credit card bill each month.
- Increase your 401(k) contributions. If you are lucky enough to have an employer contribute towards your 401K, you should match that contribution, in order to maximize it. It’s free money in your account.
- Add to your IRA contributions. It is a no-brainer to build up your nest egg. A Roth IRA is preferable to a traditional one, if you qualify. Younger taxpayers have the advantage of being able to withdraw from it tax-free, when they are ready to retire.
- Start or add to a health savings account (HSA). One of Americans’ biggest fears is running out of money in their old age. You can prevent this by making contributions. A high-deductible insurance plan is required to open an HSA. What are the advantages? It has a triple tax benefit: a deduction for contributions being made, your money grows tax free, and withdrawals made for medical bills are also tax free.
- Pay down student loans. With increasing interest rates, student loans are becoming more expensive than government loans. It’s worth it for taxpayers to eliminate the debt, since it prevents workers from saving for their retirement.
- Reward yourself. You may feel you deserve to treat yourself. You can use part of your tax refund to purchase a new TV, have a nice family dinner at a fine restaurant, or even splurge on a long awaited vacation. Just remember that it is advised that you shouldn’t spend more than 10% of your tax refund.
- Begin saving in a 529 account. The earlier such a plan is started the better. Don’t be the taxpayer who regrets not taking out a savings plan early in your child’s life, for their secondary or college education. While you do not get a deduction for these contributions, your savings grow tax-free and qualified withdrawals are tax-free as well. You can set up one at any financial institution.