7 ways to use your tax refund

Saving for the Unexpected: Using a Refund to Help Smooth Overcoming Unexpected Household Needs and Appetite for a Vacation

A refund in this range used wisely could be enough to jump-start a savings plan or help someone save thousands of dollars in interest payments on debt, but that’s only if the money is used wisely before it gets frittered away or spent on groceries and regular bills.

Setting aside cash can help smooth out the effects of unexpected bills. “When — not if — the unexpected happens, they’ll be prepared,” said Cindy Scott, a certified financial planner with Schwab Intelligent Portfolios Premium, an automated investment service.

What is the best method to do that? America Saves, a nonprofit initiative of the Consumer Federation of America, recommends the “past-present-future” approach (or the “30-40-30” approach, if you prefer numbers). The director of the nonprofit America Saves, Kia McCallister-Young, explained that it calls for allocating 30 percent of your refund to reduce your debt (spending from the past); 40 percent for current needs or wants, part of which can be allocated to emergencies; and 30 percent to your future — for college or retirement savings, a down payment on a home, or even a well-deserved vacation.

When a paycheck can barely cover basic necessities, some people may be overwhelmed by the thought of saving a lot of money. It’s recommended that you have at least three months worth of income or expenses covered by a rainy-day fund. It might be easier to save six weeks worth of income and use your refund to build toward that goal, according to Dr. Roll.

What to Do With Tax Return: The Rise Of Interest-Rate Credit Cards In The 21st Century And Why You Shouldn’t Use Your Tax Return

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The IRS had issued more than 59 million tax refunds as of March 24 with an average refund of $2,902. This year’s average tax refunds is a bit lower than last year, but it’s still a nice amount for most taxpayers to use.

With interest rates rising throughout 2022 and into 2023, credit card debt and other variable debts are now more costly than they have been the last few years. The Fed recently showed that the average credit card interest rate on accounts it assessed worked out to 20.40%, compared to 16.45% throughout 2021 and 16.28% in 2020.

Beyond credit cards, you may want to make progress on high-interest auto loans, personal loans or any other outstanding debt with a high interest rate. Doing this could put you in a better place financially, and your future self will thank you.

If you can’t pay down all of your credit card debt at once, you can use your tax refund to cover a portion of it. If you want to save money, you might want to open a credit card with a balance transfer feature, which will allow you to lower your interest rate. Cards like the Citi® Diamond Preferred® Card offer an introductory 0% APR for 21 months (17.74% to 28.49% variable APR afterward) on balance transfers.

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What to do with tax return? A comparison of high-yield CDs, CIT Bank Savings connect, and traditional IRAs

As an example, you can get a 10-month CD right now through Marcus by Goldman Sachs with a 5.05% APY as long as you have at least $500 to stash away. The CIT Bank Savings connect account has a 4.5% APY on deposits and is one of the best high-yield savings accounts.

Maybe your debt level and short-term savings are satisfactory but you want to save more for the future. If you meet eligibility requirements you can always increase the percentage you contribute to a workplace retirement account or traditional IRA.

Most people will be able to contribute up to $6,500 across all IRA accounts in 10 years. There is an exception for people who are 50 and older, who can contribute up to $1,000 more for a maximum of $7,500.

If you are married with an income over $214,000, you won’t be able to contribute directly to the IRA if you have an income that surpasses the income limits. You may also be stuck contributing a reduced amount if you are married filing jointly with an income from $204,000 to less than $214,000. Other income caps and phase-out periods apply to single filers, heads of household and qualifying widowers.

And while anyone with earned income can contribute to a traditional IRA, contributions are only tax-deductible for people who meet certain criteria and/or income requirements.

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The Bestow Life Insurance Company: Investing Your Tax Refund Money in Underlying Funds to a 529 College Savings Plan

Many states offer tax advantages for contributing to a 529 college savings plan, and it’s possible to invest the money in underlying funds so it can grow and compound over time. As an example of tax advantages, the state of Indiana offers a 20% tax credit on the first $7,500 you contribute to a 529 plan in 2023.

The Secure Act 2.0 has built-in relief for people who are worried about overfunded colleges. People with a 529 plan open for at least 15 years are able to move up to $35,000 in unused college savings plan funds into aRoth IRA for the person’s beneficiary.

Buying life insurance is something that’s easy to put off, but it can easily cost you less than what you would pay for a dinner out each month. With your tax refund money safely in your account, it definitely makes sense to price out coverage for yourself and a spouse “just in case.”

An example is the company Bestow which lets you buy cheap term coverage to protect your family from medical expenses if they need them. Coverage is available in amounts from $100,000 to $1.5 million, and you can apply if you’re ages 18 to 60. Term life insurance from Bestow starts at just $11 per month.

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Investing in Yourself for What You Really Need: Mattress, Home Decor, or Laptop for the Kids – An Alternative Approach Depending upon Your Goals

Investing in yourself can look different depending on your goals, and you can choose to focus on your professional life or something else entirely. For example, a tax refund of an average amount could be enough for a few years of gym memberships or home gym memberships. so you can finally get in tip-top shape. You might as well get a new wardrobe or dental work since you have been putting it off.

You could spend the money on memberships in a mastermind group, a certificate program or other type of formal education if you wanted to. The average cost of one year of community college is not likely much more than the average tax refund at $3,860 for in-district tuition for the 2022 to 2023 school year, so that’s an option too.

There is nothing wrong with setting some of your tax refunds aside for yourself, as long as it is for something you really want. It could be a new mattress, home decor, or a new laptop for the kids which you desperately need since the last few years.