Inside: Find out how to use your tax refund to improve your finances. And maybe have a little fun, too.
Tax season is here and you might be looking forward to a nice refund. Or maybe you already have your refund and are trying to figure out how to make the best use of the money.
While it’s tempting to splurge with a tax refund, a bit of careful planning can put the money to work for you. Here are nine smart ideas for using your tax refund money.
1. Start or build up your emergency fund
The rule-of-thumb for emergency funds is to have three to six months worth of essential expenses available.
If you don’t already have your safety net in place, you may want to stash your tax refund money in a separate savings account.
Even a little bit stashed away is better than nothing, and you’ll be glad when an unexpected expense or job loss occurs.
2. Pay down high-interest debt
If you have a running balance on credit cards or other high-interest debt, your tax refund is a good opportunity to pay that debt down.
By paying down high-interest debt such as credit card bills, you will save money on interest payments and probably improve your credit score in the process. However, make sure you set yourself up to not add on to that debt again later.
Usually mortgage loans are at a low enough interest rate that applying your tax refund to paying it down isn’t always the best option. (Not bad, just not the best.)
However, if you’ve had your mortgage for at least 2 years and paying it down with the tax refund money would make you eligible to eliminate PMI from your mortgage payment, then it is definitely worth a look. Run the numbers and check with your lender. In this case, paying down the mortgage could save you even more in the long run.
3. Catch up on old bills
If you’re behind on your bills, you can use your tax refund to get caught up on those utility or mortgage payments.
However, if you are considering filing bankruptcy, you may want to talk with a professional before paying any past-due bills as paying them may restart the clock on debts past the statute of limitations.
4. Contribute to a retirement account
A Roth IRA will let you invest and grow your money until you are ready to withdraw after age 59½ and qualified withdrawals will be tax-free. You could contribute up to $6000 ($7000 if age 50+) in a Roth IRA. The account also has the benefit of being able to use the funds toward a first-time home purchase or towards education expenses.
5. Contribute to an education savings account
If you have children and your retirement savings is in good shape, using your tax refund money to contribute to an education savings account is a good option.
A 529 plan or Coverdell savings account will allow your money to grow tax free when used for education expenses. Check with your state to see if contributions to your own state’s plan are eligible for an income tax deduction.
6. Replace old and inefficient appliances
Appliances wear out and each year new ones become more efficient. If your water heater, washer, dryer or refrigerator is on its last legs, getting a new one may be in order. Donate your old, working, appliance to charity and save money on your utility bills with your new energy efficient one.
7. Home improvements
Some years, home improvement costs may be minimal and other years… Well, roofs, flooring and remodels can cost quite a bit. If you have a larger refund in hand, it could be a good time to tackle some of the more expensive home maintenance and improvement projects.
Even smaller refunds, though, can pay for fresh paint and faucets.
8. Donate to charity
Having an extra sum of cash in hand provides a good opportunity to give to a cause you care about. Be sure to keep receipts/paperwork regarding donations should you choose to itemize deductions next year.
If your financial health is in good shape, go ahead and splurge. Go on a nice vacation and enjoy yourself. There’s nothing wrong with treating yourself a little bit with your tax refund.
Beyond that, put the money to good use and have it work for you. And, if you’re getting a large refund each year, you may want to double-check your tax withholding on your W-4 form so you can use the money throughout the year rather than as a single lump sum.
What do you do with a tax refund?