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As the notorious April 15th tax filing deadline looms closer, you might want to take the opportunity to figure out how you will choose to maximize your tax refund. You certainly have a wealth of options – including a nice splurge – but there are some options that you might want to take that will repay you for years to come.
1. Pad the emergency fund
Sometimes it’s best not to spend the money away at all, but rather keep it somewhere safe. It’s not necessary to put it into a high-risk, high-interest investment. The purpose of an emergency fund is to put it away somewhere stable and forget about it until you truly need it. While you’re putting it away for this rainy day, it may as well make at least a little bit of interest!
2. Pay down high-interest debt
One way to ensure your refund benefits you as much as possible is by putting the money toward paying something off that may be costing you hundreds of dollars every year. Check out all of your debts – personal credit cards, store credit cards, student loans, auto loans – and see which one has the highest interest rate. When your return comes in, put a large amount toward that high-interest debt balance. This is a good way to end those exorbitant interest payments and use this cash to free up income for future savings – or splurges!
3. Invest in the future
Sooner or later a major purchase will arise and you will truly need this money. Use your refund to contribute to one of these big savings projects. There are many options open to you:
- 529 Plan – You could place it into your child’s college fund. A 529 plan is a great way to build this fund while avoiding the federal and state taxes usually charged with investment earnings. Funds from a 529 plan can be used towards not only tuition, but also textbooks, room and board and education-related computer equipment.
- Certificate of Deposit Investment – A Certificate of Deposit investment (commonly referred to as CDs) is a great option for those who want to invest their refund but may be risk-averse or new to investing. These accounts are insured by the FDIC and are low-risk investments. With CDs, you cannot access the funds throughout the prescribed term, but this allows you to rake in more interest than other, more flexible types of deposit accounts.
- I Savings Bond – Another option for maximizing your refund is to place it in an I Savings Bond (commonly referred to as an I Bonds). This option grows your savings based on both inflation rates and a fixed rate. Like CD accounts, I Bonds cannot be touched for the specified term periods, which can be anywhere from one to thirty years. This is the trade-off for protecting your savings against inflation while also earning interest.
- Stock Options – Lastly, you can also spend your refund on diversified stock investments. This is a bit of a higher-risk option, but can provide the highest returns if you have a well-diversified portfolio. This, of course, takes some time to research. Meet with a trusted and certified financial planner to walk you through your options.
4. Invest in your dream fund
If you’ve already invested, saved and contributed to all of the funds you think you’ll need, the last option is to “invest” your refund into a big project or experience you have been thinking about for a long time.
A tax refund can be seen as an extra bonus or as an opportunity for future growth. Whether you invest in your dream fund, your financial future, or someone else’s future, make sure you take the proper steps to ensure that your refund pays dividends many times over. Remember, there are several free online tax calculators that can help you get your taxes in order.