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“But, in this world, nothing is certain but death and taxes.” – Benjamin Franklin.
With April 15 a little over 3 weeks away, some of us may find ourselves owing Uncle Sam money.
Conversely others may be delighted to find out that instead they will be receiving money from the government in the form of an IRS refund, often in the 4 to 5 figure range.
Although there might be a temptation to blow this “new found money” on something frivolous, these individuals have an opportunity to accelerate their path to wealth if these funds are deployed in a meaningful manner.
Jacob H, from Providentmetals.com contacted me hoping to share some insight on how this money may be put to good use.
[Disclaimer: Jacob and I have no financial relationship]
With tax season right around the corner, it’s not only time to ensure that you get all of your tax paperwork together and submitted, but it’s time to begin considering what you’ll do with your tax refund.
While the common inclination for many people is to spend their tax refund on something they’ve long wanted—a new television, an instrument, a vacation—you should consider how you can make the most of it.
Here are six ways that you can make the most of this year’s tax reefund, investing it to benefit your future self.
1. Invest With Foresight: Consider an Emergency Fund
Do you ever feel worried about how much money you have on reserve, say in the event of a structural issue to your home, health scare or layoff?
Have you had a lingering issue with your car that you’ve avoided dealing with?
Has your home washing machine become more of a fixture and less a working appliance due to its mechanical failures?
While overlooking these issues can be understandable, dependent upon your financial situation, you can utilize your tax refund to properly take care of these issues.
Even if your tax refund is around $2,000, that’s money that can be stored into a savings account in the event of a “rainy day,” or can be applied to necessary maintenance of expensive items in your possession.
2. Pay Off Some (or All) of a High-Interest Loan or Debt
If you have high-interest credit card debt or loan debt sitting around, now is the time to pay it off.
Financial advisors and planners state that paying off high-interest loans is one of the smartest investments you can make, as it will save you a great deal of money in the long run.
Even if you have a credit card with an APR of 17 percent (which is on the lower side), that is still a notable percentage of interest.
Paying off the better part of that debt is like seeing a 17 percent return on your investment (ROI), as that’s money you won’t have to pay in the future.
When it comes to loans like student loans, mortgages, car payments and more, you’ll want to weigh which interest rates are more worthwhile to pay off at the time.
Like any investment, you want to weigh your ROI, guaranteeing you are making the most of your tax refund.
3. Contribute More to Your Retirement Plan
If your employer is already matching your 401(k) or 403(k), you should consider increasing the amount that you’re contributing.
Keep in mind the IRS limits each year for how much taxpayers are allowed to contribute to their 401(k) each year, there’s no better time than now to begin contributing more to your retirement funds.
Besides utilizing your tax refund, consider freeing up money elsewhere to increase your yearly contributions, either by reducing your withholding while increasing 401(k) contributions or decreasing frivolous spending elsewhere and diverting that to your retirement account.
4. Invest in a Self-Directed IRA
While a traditional IRA is limited to investments such as cash, stocks and bonds, a self-directed IRA provides you with the option for alternative investments.
In particular, rather than relying on the inherent value of the U.S. dollar (which has been in decline) or the power of large banks and brokerages, you can invest in the power of precious metals such as gold and silver.
Once you have found a reputable custodian—a trustee organization that will physically look over your precious metal investment portfolio for you—you should take your time researching the spot price of precious metals like gold, silver and copper.
Once you have a price that you are willing to settle on, it comes time for you to make your investment.
You’ll be putting your tax refund to good use, investing in an asset that will prove beneficial in the future, all the while allowing you to rely on a paperless investment.
Unsure of what precious metal items are worth your investment?
Look for reputable mints of bullion and precious coins, such as the well-known American Eagles.
5. If You Have Children, Invest in a College Fund
Looking to save money, for both you and your children, in the future?
Look no further than a college fund!
A 529 Plan, an education savings plan, is the place to start if you think this is right for your family, as you are able to invest your tax refund into a tax-free account, accruing interest over time to cover qualified higher education expenses.
There are two options currently available under the 529 Plan: (1) the Prepaid Tuition Plan and (2) Education Savings Plan.
The Prepaid Tuition Plan allows for you to purchase credits ahead of time at participating universities and colleges, while the Education Savings Plan allows you to set money aside for fees such as tuition, room and board and more.
6. Donate a Tax-Free Gift to a Charity of Your Choice
Unsure of just what to do with your investment?
Consider investing in an organization that you morally support.
Although you might not think of it, your donations can be managed much like any other investment, allowing you to spend your money on specific charities that you support.
Consider how you manage your investment portfolio.
You ask yourself, “What is the ROI on each one of my investments and which are worth the most of my attention and assets?”
You can ask yourself this very same question when looking into donations, determining the ways in which your money is being used by charitable organizations, asking just how much your dollar is worth.
With this in mind, you can make the most of your tax refund by investing in the most reputable charities within your radar.
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Nice post, but one should never be delighted to find out they gave an interest free loan to Uncle Sam, only to get back less money after inflation erodes it for a year 🙂
I totally agree (and actually have a post on that I wrote coming up in a few weeksl). It’s interesting that uncle Sam will penalize you if you underpay your taxes but certainly does not give a bonus if you overpay
At the risk of being an annoying vocabulary stickler, the tax “return” is the paperwork (or electronic document) that gets filed to Federal (and state) taxing authorities, not a financial windfall.
If I am owed a “refund”, I expect that I will use it to prepay next year’s estimated taxes as I did in 2018.
Great point Vagabond. I too refer to the filing of taxes as my return.
Just went and replaced return with refund (I think I got them all in both the dark and light versions (all while I am waiting on line at the Aerosmith rock and roll coaster line at Disney so that’s pretty efficient use of time. Lol)
Great post! A very timely post also as many are just filing or receiving their refunds currently.
Thank you Andrea ?. I myself will be owing uncle Sam this year.
Leave the damn thing at Treasury to pay next years tax nut. The biggest threat from IRS is NOT tax free loans. It’s getting audited and penalties. You gotta pay the 1st installment on taxes anyway BY APR 15th.
I actually just read about the fact that quarterly payments are still due April 15th even though the deadline has been moved back.
Hope it doesn’t catch a few people unaware
I really like how the entire personal finance community is telling their readers to invest their tax refund instead of using the tax refund to treat yourself because you should treat it as “bonus income”.
That’s why I will forever be in the personal finance blogging community!
It really is a mindset change for sure. I like the idea of investing 90% of a bonus/unexpected windfall and 10% spending to treat yourself