We all look forward to receiving our tax return each year. For the past few years, the average refund has been around $3,000. If you have a substantial refund check on the way, the temptation is going to be to spend it on something fun, but you may want to instead consider using the extra cash to reinforce your personal finances. Here’s a list of six responsible uses for your upcoming tax return:
1. Take care of your credit card debt
Using your tax refund to pay off a credit card balance is a very economical use of the money. If you can afford to pay your entire balance, you will be able to close some accounts that are charging high interest fees.
2. Contribute to your retirement savings
As an individual, you can contribute up to $5,500 per year to an IRA (or $6,500 if you’re 50 or older). If your modified adjusted gross income is less than $127,000 for a single person or less than $188,000 for a married person filing jointly, then you will be able to contribute to a Roth IRA, which will let you withdraw the money tax-free when you enter retirement.
3. Take a look at your emergency fund
Over the past several years, many have found it necessary to dip into their emergency funds. Now that you have some extra money, you can use some of it to start adding back to that fund. This may have the extra bonus of helping you avoid new credit card debt if an unforeseen expense comes up. For the best results, keep your emergency fund in an interest-earning savings account or a money-market account.
4. Add to your college savings
Consider using your extra money to contribute to a 529 account. This will allow you to use the money tax-free for things like college bills—and you may also be eligible for a state income-tax deduction for your contribution.
5. Prepay for your vacation
Instead of paying for your vacation using a credit card and paying the interest long after the vacation is over, set aside money for the trip beforehand. Use a separate account for this money, then add some cash to it each week. You can also use this saving method for other expenses, such as a new car or holiday gifts.
6. Pay for home improvements
Most refunds won’t be enough to cover major home improvements, but they can still pay for smaller projects. Use your return to paint a room, replace a sink or make some improvements to your yard, for example.
For more financial tips and tax assistance, contact us today at Kristina’s Abacus!
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