Smart tips on what to do with your tax refund
- If you have debt, you may want to use your tax refund to eliminate as much of it as possible.
- Then, consider saving your tax refund to strengthen your retirement accounts.
- If you’re debt-free and satisfied with your savings, go ahead and splurge on something fun — within reason.
Are you getting a tax refund this year? Here are some great ways to take advantage of the extra cash.
Tax refund tips
1. Give your emergency fund a boost
Did that recent car repair or new roof take a chunk out of your rainy day money? Use your tax refund to get your emergency fund back on track. An emergency fund can help you avoid selling investments at the wrong time to pay for unexpected expenses. Depending on your age and life circumstances, you should save anywhere from 12 to 36 months of living expenses. The closer you are to retirement, the more you need saved. Learn how systematic saving can help.
2. Pay down your credit card debt
High-interest debt costs almost everyone more than they can make on their savings and investments. Use that refund to pay off your credit card, student loan or other high-interest debt. You could lower your monthly payments, making it easier to continue eliminating the debt. Follow these tips to help you pay down debt – and save.
3. Pump up your retirement savings
If you haven't already, contribute the maximum you're allowed to your 401(k) or traditional IRA. Or if you have a Roth IRA that is not fully funded, complete it and when all the conditions have been met you will be able to take out the money tax-free. You'll help secure your future and could reduce your taxable income for the year. If you're already contributing the most allowed to tax-advantaged accounts, consider setting the money aside in a taxable account with diversified investments earmarked for retirement.
4. Prepay your mortgage
Making just one extra payment a year on a 30-year mortgage can reduce your term to 22 years. If you're nearing retirement, this strategy may be especially appealing — you don't want to continue making mortgage payments when you stop working and your income stream changes.
5. Share the wealth
Make a contribution to a charity you believe in. You'll feel great and maybe get a tax deduction, too. Here are 8 tips to help you give wisely.
6. Go ahead and splurge — within reason
Remember, this money would have been in your pocket if you hadn't overpaid your taxes. So, definitely take a bit of it and buy theater tickets or have a nice dinner out. But don't go crazy. Spend the same percentage on a treat as you would normally spend from your regular paycheck.
Finally, if you're getting a large refund, it may be because you are over-withholding. Check your federal income tax withholding allowances to find out. If you want to adjust how much you're withholding, complete a new Form W-4, Employee's Withholding Allowance Certificate. For more information, visit our Tax Center and use our tax planning tools and resources.