You might be getting a tax refund this year — and, of course, you’ve likely thought about that nice, big check in your account and how to spend it. The average direct deposit tax refund for 2018 is expected to be $3,199.* Instead of spending it on something you’ll regret later, consider thinking long-term and investing in your future. There are many ways to use your tax refund, but here are five options worth considering that could work well for you.
1. Increase your 401(k) contributions.
This is one of the most common ways to invest your refund. Contributing to a 401(k) means that your money grows tax-deferred — that is, paying income tax on your contributions is postponed. Your contribution comes out of your paycheck pretax, but when you retire, the distributions are taxed as income. If you’re not sure how much to contribute to your employer’s 401(k) plan, at least contribute as much as your employer matches. That could be as low as 3% of your salary, or higher.
2. Open an IRA.
If your job doesn’t offer you the option of investing in a 401(k) plan, consider opening an investment retirement account (IRA). You decide if you want all of your tax refund or only part of it deposited into the account. It’s that easy, and there’s no other work required. Doing some research ahead of time is recommended, though, as you’ll want to know whether a Roth or traditional IRA is right for you. Contribution limits are also different. You have many personal investment options, and a CresCom financial advisor can answer your questions and help you determine what’s right for you.
3. Pay off your debt.
If you have a few credit card balances and only pay the minimum each month, you’ll pay interest on that balance — and it could take years to pay off. For example, using a simple online credit card calculator, if your balance is $5,000 with an 18% interest rate, and your minimum monthly payment is $125, it could take over five years to pay off, and you’ll pay over $2,600 in interest. Instead, pay off your balance now so you’ll have more money to save toward retirement.
4. Invest in the stock market.
Why should you invest? Because you have an opportunity to potentially increase your wealth. By investing your money in the stock market, you can work toward growing your money so you can save for education, retirement and even vacations. Investing for retirement is especially smart because, if you leave your money invested in the stock market over the long haul, any potential returns are compounded over time in much the same way that interest is compounded. You don’t earn a set interest rate, but you could potentially see returns over time based on the change in the value of your investment. Please keep in mind that with stock investing, your account also has the potential to go down over time, and loss of principal is possible.
5. Buy life insurance.
If you’re young, you might be unlikely to consider this, but it’s definitely worth it if you are married with a family. Life insurance pays a death benefit when you die. For a few hundred dollars, you can use your tax refund to buy, at a fairly low cost, a term life insurance policy that protects your family for a set period should the unexpected happen. What if you were to suddenly be killed in a car accident? Life insurance does not cover the accident itself, but if you die, the claim would be covered. If your family has no money coming in, how will they maintain the same standard of living? Even the smallest policy can provide a safeguard for your family during a difficult time.
If you’re curious about other investment options for your tax refund, a Standard Affluent Private Bank financial advisor can help you evaluate your financial goals and needs, as well as help you make sound investing and planning decisions.
* https://www.irs.gov/newsroom/filing-season-statistics-for-week-ending-february-23-2018
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities offered through LPL Financial, Member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. Standard Affluent Private Bank and Standard Affluent Private Financial Services are not registered brokers/dealers and are not affiliated with LPL Financial.
