8 Profitable Ways To Invest Your Federal Income Tax Refund And Build Wealth
Tax season is almost here! While many people groan over the tedious tax tasks, many also celebrate their huge tax returns. Even though rumors circulated that the government shutdown caused a delay in tax returns, know the IRS is still working hard to deliver your extra tax dollars. What will you spend your tax return on? A vacation? A new phone or TV?
While these are nice expenses, you’ll appreciate your extra tax dollars going towards a retirement investment or even towards paying off some debt. Here are 8 ways to profit even more from your federal income tax refund.
1. Put Your Refund Towards Your Emergency Fund
Nearly a quarter of Americans don’t have an emergency savings account. Are you one of these Americans in the statistic? If so, use that hefty tax refund and start creating a rainy day fund. Financial experts recommend you keep three-to-six months worth of expenses in your savings account. What happens if you need sudden car repairs? Or you have to be rushed to the ER?
That few hundred dollars or extra grand worth of unpaid taxes could benefit you in these situations.
2. Pay Off Debt
Before you can start a rainy day fund, you should pay off any debt. From loans to credit cards, the extra cash you get from the IRS should go toward minimizing your debt. This is recommended, beyond decreasing the debt burden. If you only pay minimum payments on a maxed-out credit card, you get charged interest payments.
Eventually, you’re only paying off the interest charged on your debt. Taking those extra hundred dollars towards your debt helps keep interest at bay and will help you pay off your debt faster. What if your debt isn’t toward a loan or credit, but rather toward an auto loan or a mortgage? It’s best to speak to your lender. There may be penalties when paying off these loans before the maturity date.
3. Invest In Your HSA
Do you have a health savings account or an HSA? You can use your tax return to help fund your health savings. Those who have high-deductible health insurance can qualify for an HSA and they’re a great way to save for future medical expenses. Many people even save a good chunk of cash on their medical expenses.
Your HSA is usually funded through a paycheck deduction, but you can put money in your account yourself. The account is not taxed and withdrawals aren’t taxed, as long as they’re used towards medical expenses.
4. Add The Funds To Your Retirement Account
Financial experts recommend you have 80% of your salary saved in a retirement account. If you have nowhere close to this amount in your retirement account, it’s a good idea to add your tax return to your retirement savings each year. What if you already have a debt to pay off? While the golden rule is to pay off debts first, there’s no minimizing the importance of saving for retirement.
5. Buy Stocks
Do you want to turn your tax return into more money? Who wouldn’t! This is entirely possible when you buy stocks. On average, traders can increase their stock market contributions by 10% annually. If you invested all of your tax refunds, you can make some serious extra cash! Keep in mind, the stock market is notorious for being volatile.
Don’t be surprised if you receive a better outcome one year and don’t earn as much the next. Not sure where to start? Don’t feel ashamed if you’re confused. There are many different stock market approaches and ways to invest. Do your research before creating any accounts. You can also seek assistance from a financial advisor or a stockbroker.
What if you’re doing financially well, have enough money in your savings and retirement accounts, but you still want to make a smart investment with your tax return? Why not make a donation? If there’s a charity or a cause you’re passionate about, use some of your tax returns toward those causes. There are many different charities — from education to health to animals and the environment.
Keep in mind, not all charities are in it for the good of the world. Unfortunately, charity fraud is common. Do your research before donating a large sum of money to a charity.
7. Put The Money Towards College
Are you a student or want to be a student? Use that tax return toward your education. The average cost of college tuition is almost $10,000 per year. When adding other expenses such as books, those prices add up. In addition, many students can’t afford these expenses. In 2015, the average student graduated with over $30,000 in debt.
It’s doubtful that your tax return will be $10k, but those few hundred dollars can cover books for a whole semester. In addition, if you’re a parent saving money for your child’s education, you can use your tax return toward a 529 college savings plan. This is a tax-free savings account and there are no penalties when you use the money towards education.
8. A Down Payment On A House
Will this year be the year you buy a home? While shopping for your future home is exciting, you have the down payment burden in the back of your head. Fortunately, most lenders only expect a 10% down payment as opposed to a 20% down payment, which was the previous standard. Even with the lower down payment percentage, that’s still a lot of money.
If the house you want is $200,000, you’ll have to pay a $20,000 down payment. Not sure how to save up $20k? You can always start with your tax return. Those few hundred dollars will make more of a difference than you think.
How Much Will You Get Back On Your Federal Income Tax Refund?
Are you starting to file for your federal income tax refund and are unsure of how much you will get back? Just take a look at your paystub. Your pay stub will state how much you paid in taxes throughout the year. Do you not receive pay stubs from your employer?
Don't fret! Let us help you create your pay stub today!