What to do with my tax refund?

Maybe you’ve received your refund already or maybe the check is in the mail. People are typically elated to receive a refund, however, I would suggest that they are doing poor tax planning. If you are receiving a refund you’ve basically overpaid the government and provided them with a 0% interest loan! Now, that may not be so bad for some people who have a tough time saving money, as they could view their over-payment as a forced savings. The big question is what they do with the refund? Many mistakenly look at it as a “bonus” or “free money” so they plan a big trip, buy a new ATV or spend it on an array of other things. We all want to have fun and buy new toys, but I would offer some ideas for that tax refund that will help build your financial future:

  • Use the refund to pay down student loan or credit card debt– Reducing high interest loans can pay off big in the future. Remember, if your loan is at 10% you would need to get that kind of return on your money to stay even. Paying the loan down automatically saves you 10% in interest costs.
  • Start a 529 College Savings Plan for a child or grandchild– These types of accounts can be very beneficial for those planning to obtain higher education. The earnings grow tax-deferred and if used for appropriate education expenses are tax-free.
  • Invest the funds in your brokerage account– As you add to your investments every year you are building your retirement nest egg and allow the money the potential to compound over the years.
  • Rebuild an emergency savings account if needed– We advocate to have 3-6 months of living expenses in liquid reserves that you could get immediately in case of an emergency. If you are below those levels it may be time to replenish them.
  • Fund a Roth or Traditional IRA (if eligible) – Similar to the college account these funds grow tax deferred. Once you are 59 ½ years old you can withdraw the funds penalty free. Roth funds have already been taxed and come out tax free. *Traditional IRA funds have not been taxed which is why you received a deduction for the year you made them. Withdrawals will be taxable, but remember any growth in the account has never been taxed.

Everyone wants to do or buy things that give us gratification and that’s not a bad thing. However, if they viewed that money as being theirs all along would the same choices be made? I think not. If you’ve been receiving a tax refund consistently over the years and been spending it, make this year the year you invest it in yourself and your future. Even just starting with ½ of the refund would help immensely over the years.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Billy Peterson and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. You should discuss any tax matters with the appropriate professional. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Prior to making an investment decision, please consult with your financial advisor about your individual situation. *Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

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