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How Can I Invest My Tax Refund?

Posted by MB Group on May 3, 2021 11:45:00 AM

In the 2019 tax year, the average income tax refund was $2,535. While splurging on a stellar vacation or a shopping spree may seem like an option, it's not the best option. In fact, there are a number of different ways you can invest your tax return to amplify the benefits for several years to come. Let's take a closer look at a few top ways you can intelligently invest your income tax refund. And if you would like a more tailored or personalized solution, don't hesitate to reach out to the team at the MB Group.

Slash High-Interest Rate Credit Card credit card Debt

While convenient, credit cards can pose a financial problem and drain, especially those with high balances and matching high-interest rates. Because of this, it's a solid strategy to use your income tax return to slash credit card balances with high interest rates. This is due to the fact that the return on your money is equal to the interest rate. 

In other words, if your interest rate on one credit card is a whopping 24%, every dollar you put toward this debt means you're essentially seeing a return of 24%. And this rate of return is much higher than what you'll typically see in the market.  

You can also use your return to pay other debt, such as your mortgage, student loan, or a car payment. If you're considering it, always start with the highest interest rate first. Paying down debt with the highest interest rate first always makes the most sense because it will reduce your payments. 

Create an Emergency Fund with Your Income Tax Refund

Life is full of ups and downs. Considering the one constant in life is change, it's imperative for everyone to have a rainy day fund or emergency savings fund. Unfortunately, less than 4 in 10 people (39% of Americans) have the ability to pay for an unexpected $1,000 pop-up expense in cash.

You can, however, remove your hat from this number by choosing to invest your tax return in yourself by opening an emergency savings fund. Just as the name suggests, an emergency savings fund is money you have set aside for emergencies. Relying on the money in your emergency fund can prevent you from having to charge it to a high-interest rate credit card. You can even work with a financial advisor to create an emergency savings account that actually earns interest. 

401k401(k) Income Tax Savings Investment Options 

If you participate in your employer-sponsored retirement plan, such as a 401(k) or 403(b), you're taking the right steps toward a more secure financial future. However, if your employer offers a match and you're not taking full advantage of it, you are still leaving money on the table.

One extremely smart and savvy income tax savings investment option is to beef up your contributions to take full advantage of the employer match. Whether you physically increase your contributions and use your income tax return to supplement your income or decrease your federal tax withholding, taking full advantage of the employer match can essentially double the contribution amount. 

Invest My Tax Refund into An IRA

Depending on your age, retirement can seem like eons away. Even so, it's never too early or late to add some shine to your nest egg, and using your income tax refund to contribute to a traditional or Roth IRA are both excellent income tax saving investment options. Here are brief descriptions of the two types of IRAs.

Should I Invest My Tax Refund into a Traditional IRA?

With a traditional IRA, you will receive a tax deduction upfront. The funds will then grow tax-deferred, but you will pay income tax when you start taking withdrawals. You will be eligible to take withdrawals at age 59.5, and you must take Required Minimum Distributions (RMDs) at 72. 

Should I Invest My Tax Refund into a Roth IRA?

With a Roth IRA, you contribute to it with after-tax funds, which negates the tax deduction for today. Instead, you defer the benefits of a Roth to the future. When you access the funds in the account in retirement, you can do so tax-free. And there are no RMDs for a Roth, which makes it the perfect vehicle for passing an inheritance on to loved ones. In most instances, you can even withdraw money from a Roth without paying a penalty to pay off a home, pay for a child's college, and a list of other allowable reasons. 

Deciding whether to invest your return into a Roth vs traditional IRA is a personal decision, but an experienced financial advisor can help you review the pros and cons of each. 

Should I Invest My Return in Stock?stocks

If you're confident in your retirement planning and retirement readiness, investing your refund in stock or mutual funds may open the door to you getting more than what you put in. Over history, the stock market has rendered higher returns than Treasury bonds and savings accounts. Yet, one of the important aspects of the stock market to consider is that it can be volatile and returns are never promised (as with Treasury bonds). 

Even so, you can invest in mutual funds or individual stocks through a financial advisor, broker, or robo-advisors, which are low-cost options for DIY investors. If you are considering investing your income tax refund in stocks or mutual funds, it's best to do so with a focus on long-term retirement goals. 

Contact MB Group to Maximize Your Income Tax Refund

When it comes to deciding how to best invest your income tax refund, there are a number of different available options. And the experts at the MB Group can help you carefully consider all of your options and make the best decision. 

Contact the MB Group today for tailored tax planning solutions. 

Topics: Taxes

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