Getting a Tax Refund? Use It Wisely
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Getting a Tax Refund? Use It Wisely

Getting a Tax Refund? Use It Wisely

It's tax time! For many of us, it’s when we get our biggest financial windfall — a tax refund. For those of you expecting to get one, the logical question is, what should you do with it?

You could just spend the money on something you want, but if you’d like to maximize the financial benefits from your refund, you should consider these options:

Invest. In 2019, the average tax refund was about $2,700. This was in part due to changes in the tax laws and the failure of taxpayers to adjust their withholdings in response. However, if you were to receive $2,700, you’d be almost halfway to the annual IRA contribution limit, which in 2020, is $6,000. (If you’re 50 or older, you can put in up to $7,000). If you have already “maxed out” on your IRA, you could use your refund to fill in gaps you may have in other parts of your investment portfolio.

Pay insurance premiums. Nobody likes paying insurance premiums. Yet, if you have anyone depending on you, you will certainly need life insurance, and possibly disability insurance, as well. And if you want to help protect your financial resources later in life from threats such as an extended — and hugely expensive — stay in a nursing home, you also may want to consider long-term care insurance. Your tax refund could help pay for some of these premiums, boosting your cash flow during the months you would normally be making these payments.

Contribute to a college fund. It’s never too soon to begin saving for college, which has grown increasingly expensive over the last several years. So, if you have young children, you may want to think about investing some or all of your refund into a college-savings account, such as a tax-advantaged 529 plan.

Pay off debts. Pay down or perhaps even pay off some of your debts. The lower your monthly debt load, the more money you will have available to invest for the future. Keep in mind, though, that you might not want to look at all debts the same way. For example, putting extra money toward your mortgage might help you pay it off faster, but you’ll also be funding an asset — namely, your house — that might not provide you with the same liquidity as you can get from investments such as stocks and bonds.

Build an emergency fund. By building an emergency fund containing six to 12 months’ worth of living expenses, you can help yourself avoid dipping into your long-term investments to pay for large, unplanned-for bills, such as a major car repair or an expensive dental procedure. Your tax refund could help build such a fund, with the money ideally being placed in low-risk, liquid vehicles.

Clearly, you can help yourself make progress toward a number of your financial goals with your tax refund, so put it to good use.

 

Kevin Chancellor is a licensed financial advisor who specializes in helping individuals, families, and business owners in the areas of retirement planning, tax savings, estate considerations, and education savings. He has served as board chair for the Greater Palm Bay Chamber of Commerce and works with various charities throughout the county. 

Kevin Chancellor
www.blacklabfs.com
kevin@blacklabfs.com

 

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