THE AVERAGE tax refund in 2018 was $3,169, according to the IRS. If you’re expecting some money back from the government this year, there are many ways to use it.
“Before deciding what to do with your tax refund, it is important to think about what your tax refund is and what it is not,” says Vicki Bogan, associate professor at Cornell’s Dyson School of Applied Economics and Management at the SC Johnson College of Business. A tax refund is not free money or a bonus. It is an amount that you have overpaid in taxes. If your employer withheld $10,000 from your paycheck during 2018 for taxes, and you find you owe the IRS just $7,000, you can expect a tax refund of $3,000 this year.
Here’s how your tax refund can help you prepare for retirement:
- Pay off debt.
- Pad a health savings account.
- Create an emergency savings stash.
- Fund an IRA.
- Evaluate your 401(k).
- Invest in your well-being.
Since this sum comes once a year and may not fall into your regular budget, you might decide to use it to save for the future and build wealth for later years. Here are guidelines to help you decide how to put a tax refund toward retirement.
Pay Off Debt
This may not seem like a straight path toward funding your retirement, but if you get rid of debt, you’ll end up saving money that you would otherwise spend in interest payments. “If your credit card balance is $1,000 and the APR on that card is 18 percent, you’ll spend more than $2,000 in interest over the course of 12 months for that $1,000 debt,” says Daniel Hill, president and CEO of D.R. Hill Wealth Strategies in Richmond, Virginia. By using your tax refund to pay off the debt, you could free up funds from your regular paycheck that could be put into a savings account.
Pad a Health Savings Account
A health savings account can be set up to help you pay for health care. The funds you put in can be deducted from your income when you pay taxes, and the money in the account can accumulate interest over time. When you take out the money and use it for medical expenses, the funds won’t be taxed. “If you can, you should maximize your contributions to your HSA from your tax refund check,” Hill says. The contribution limit in 2019 is $3,500 for individuals and $7,000 for families with a high-deductible health plan. “Once you turn 65, your HSA can be used to make non-medical withdrawals for expenses incurred from long-term care and even for items such as hearing aids, corrective lenses and dental devices,” Hill says.
Create an Emergency Savings Stash
If you don’t have an account where cash can easily be taken out for an unexpected expense, consider setting one up. You’ll be able to pay the bill when your car needs a new tire or your dog goes to the vet without taking on debt or dipping into other long-term savings accounts. “Once you have this fundamental financial strategy in place, you’ll feel comfortable using next year’s refund to invest,” says Chad Tourin, a certified public accountant and agency managing associate at Coastal Wealth in Fort Lauderdale, Florida…..Read More>>