Many Americans receive billions of dollars back in tax refunds. However, most of them blow their refund on getting presents for themselves, buying new clothes, or dining out in expensive restaurants. Just a handful of Americans use their tax refund to become financially secure.
Although a better practice is to accurately prepay your taxes without any refund coming, overpaying means handing someone an interest-free loan – sometimes, tax refunds arrive as unforeseen windfalls. Instead of eating or drinking yours away, consider putting it toward a better use.
Here, we highlight 4 ways to spend your tax refund.
1. Save for college
Saving for your retirement while simultaneously saving for your child’s college is pretty difficult. With a tax refund, you get a chance to fund a 529 account that can take care of college bills. In addition, they’re federally tax-free, and usually not subject to state tax when used for qualified education expenses. You may even witness a state income-tax deduction too.
2. Invest for retirement
Putting your tax refund toward your retirement fund is a smart move. You can either use it to invest in a Roth IRA or to up your 401k contribution. Whatever path you choose to take, money in these accounts can be withdrawn tax-free, or grow tax-deferred, in the case of the Roth IRA.
3. Pay down your credit card bills
If your credit card accounts have substantial balances, you can pay them down to reduce your interest rates. Yes, they may seem like tiny pieces of plastic you carry around in your wallet, but they’re probably your most expensive debt. To get those balances down and reduce your interest, all you have to do is use your tax refund.
4. Set up an emergency fund
An emergency fund is your safety net. In this fund, you should have at least 3-6 months’ worth of expenses. This will help you pay for unexpected expenses and keep you out of debt. While you may have had to use this emergency fund money to get yourself out of a financial crisis, you can always replenish it – and a tax refund is an easy way to get that money back in that account. You may even earn interest in it.
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