What could that money potentially help you to accomplish?
According to H&R Block's Tax Institute, little of it is saved or invested: last year, more people used their refunds to settle debts or pay for cars or vacations than anything else.2
As nearly 80% of Americans end up getting a refund from the IRS each year (including about a third of Americans with incomes above $200,000), it is worthwhile to consider other uses for the lump sum.2
Where else could your refund be directed? Putting it into a savings or checking account is sensible enough – but with the pathetic interest rates most bank accounts earn today, you may be wondering about alternatives. Here are some other options.
You could effectively put your refund into your workplace retirement plan. Does your employer offer to match your retirement plan contributions? If so, you might want to think about contacting your plan administrator or human resources officer and increasing your elective salary deferrals into the plan this year by the same amount as the refund. If you deposit the actual refund dollars in a checking or savings account, you can offset the increase in the amount of salary you defer by distributing the refund dollars from the bank account to yourself. Hopefully, that checking or savings account generates at least some interest on those deposited funds as well.
You could fully fund your IRA(s) with it. If you have not made the maximum allowable IRA contribution for 2015 – $5,500 across all your Roth and traditional IRAs, $6,500 for those 50 or older – you could boost that contribution as an effect of your refund. Another option: use the refund you fully fund your IRA for 2016.3
You could tell the IRS to put the money in bonds. In addition to a direct deposit or a check in the mail, the IRS gives taxpayers who receive refunds a third option: the money can be used to purchase U.S. Series I Savings Bonds. Up to $5,000 of refund dollars can be invested this way (in multiples of $50).4
You could use those dollars for home improvement. Do you think you will live in your current home for years to come? If so, you could apply your refund to energy-saving home improvements (including HVAC, roof and windows upgrades) that could result in some nice long-term savings for you. If you make such improvements, you might even be eligible for a federal tax credit of up to $500. Congress retroactively preserved this credit for the 2014 tax year, and may act to preserve it again for 2015. Even if that credit sunsets, the Residential Energy Efficient Property Credit is in place through the end of 2016 – a tax credit for up to 30% of the cost of qualifying alternative energy improvements to a primary residence.5
You could make an additional mortgage payment or pay property tax. Assuming your home isn’t underwater, you may want to use the refund dollars to reduce mortgage principal. Also, mortgage companies often keep a few thousand bucks in escrow to pay various tax and insurance expenses linked to your home, and some will actually let a borrower’s savings account stand in for their escrow account. If they permit, you could make such payments out of an account of your own while it earns a (tiny) bit of interest.6
Lastly, think about avoiding a refund altogether. In figurative terms, your federal tax refund amounts to an interest-free loan to Uncle Sam. If you don’t particularly want to make that “loan” again, see if your W-4 can be tweaked to decrease that possibility.
You may also be interested in the following articles
- Aspects That Influence How Much Your CalSTRS Benefit Will Be Each Month
- Money Concerns for Those Remarrying
- Saving Early & Letting Time Work for You
- Volatility Is Not Risk
- Who Has to Pay the Debt after You Die?
- Valuable Financial Tips That Women Should Apply In Their Lives
- Smart Financial Moves in Your 20s, 30s, 40s & 50s
- Planning for Retirement When You Are Single
- ABLE Accounts for Loved Ones with Disabilities
- Are Women Reluctant to Talk About Money?
- Making Investment Decisions
- How Can Divorced Women Achieve a Financially Healthy Retirement?
- How Can Women Save More for Retirement?
- White House Proposes Changes to Retirement Plans
- How to Get Started with Financial Goal Planning – The Basics
- Putting Your Tax Refund to Work
- What Women Shouldn’t Retire Without
- 6 Effective Retirement Strategies for Smart Women
- You Retire, But Your Spouse Still Works
- When a Minor is a Beneficiary
1 - irs.gov/uac/Dec-26-2014 [1/12/15]
2 - money.cnn.com/2015/01/13/pf/taxes/taxpayer-refunds/ [1/13/15]
3 - irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits [1/22/15]
4 - irs.gov/uac/Ten-Things-to-Know-About-Tax-Refunds [3/13/14]
5 - money.usnews.com/money/personal-finance/articles/2015/01/09/7-recently-extended-tax-breaks-that-will-save-taxpayers-money [1/9/15]
6 - bankrate.com/finance/taxes/cut-taxes-with-early-mortgage-payment-1.aspx [12/10/14]