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The Best Way to Invest a Tax Refund in 2021

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A tax return can be used for more than just buying your girlfriend a Gucci bag. It can be a great way to get yourself financially ahead. All you have to do is make it work for you.

If this is something you are interested in doing, here are a few smart financial investments you can make with your 2021 tax refund.

Pay Off High-Interest Debt

Typically, credit cards have a high interest rate which can make it seem impossible to pay them off.

Instead of booking a vacation or buying a new TV with your tax refund, take a shot at some of your debt instead. And, start with your debt that has the highest interest rate. Getting rid of these debts will save you money every month.

If you don’t have any credit card debt, use your refund to pay down your student loans, car payment, or mortgage.

Max Out Your 401(k) Contributions

Whether you are saving with a 401(k) offered through your employer or you are saving in an IRA, the more you put into your plan the less tax you will have to pay on it.

There are contribution limits, so it is important to keep that in mind. However, maxing out your contributions early in the year can put more money in your pocket each paycheck.

If you are under 50, you can put a maximum of $6,000 into an IRA. If you are over 50, you can put a maximum of $7,000 into an IRA.

A 401(k) has larger contributions, up to $19,500 if you are under 50 and up to $26,000 if you are over 50.

Fund Your Health Savings Account

With a health savings account (HSA), you can set money aside for medical expenses. This money can be used immediately or invested and used in the future.

HSA contributions are made with pre-tax money, so whatever you put in this account will not be taxable by the IRS. 

Eligibility for an HSA depends on your insurance plan. Here are the basics:

  • If your deductible is $1,400 or more as an individual with an out-of-pocket maximum of $7,000, you will be able to qualify for an HSA.
  • If your insurance plan is for a family, your deductible will need to be a minimum of $2,800 and the out-of-pocket maximum will need to be $14,000.
  • An individual can contribute $3,600 if they are under 50 or $4,600 if they are over 55.
  • Family plans can contribute $7,200 when the policyholder is under 50 or $8,200 if they are over 55.

Down Payment or Home Repairs

If you have been saving to buy a house, consider using your refund to increase your down payment.

This can save you money on your overall mortgage amount and your monthly mortgage payments. 

If you are already a homeowner, consider using your refund to fix up some things that have been put off due to lack of finances.

Replace the leaky faucet in the bathroom or replace your roof. Using this money for improvements can also increase your home’s resale value if you decide to sell your home in the future.

Invest in the Stock Market

If you would like to do something for your future besides putting money into a retirement fund, consider purchasing stocks.

https://investorjunkie.com/investing/tax-return-refund/

The market is known historically for providing better returns than both savings accounts and Treasury bonds. However, it is important to know that stocks aren’t secure, and returns are not guaranteed.

Stock prices fluctuate and the market can be risky. Financial advisors often do not recommend investing in the stock market if you are trying to save for the short-term. The market is much better for saving for long-term financial goals. 

You can invest in individual stocks or mutual funds. Mutual funds are bundles of stock, usually purchased through a robo-advisor or a broker.

Robo-advisors can offer low-cost investing options for those who are interested in managing their investments themselves.

It is also important to remember that investments are not under the protection of the Federal Deposit Insurance Corporation like a checking and savings account would be. If the stock market drops unexpectedly, you can lose your money. 

Open a Credit Card with Benefits

If you are debt-free and pay your credit cards off at the end of every month, you might want to invest in a card that gives you the perks you are looking for in a card.

This would be especially beneficial if your other cards do not offer benefits at all, or just not the ones you are looking for.

Some credit cards require you to pay an annual fee, but they will usually supplement that fee with travel rewards or cash-back rewards.

The perfect card should be able to save you more money in the long run, even taking into account the cost of maintaining the credit card.

Donate Money or Goods to Charity

If you are well off financially and can’t think of any use for your refund, consider donating to a charity of your choice.

Before choosing an organization, you should ask the charity questions about how they spend the money you are donating and what the organization is doing to change the world.

There are so many charitable organizations that are worth donating to, so don’t be afraid to ask questions about them and how they use the money for good.

Some charities will also accept donations in the form of goods instead of money. By donating goods to a registered charity, you can help them get things they desperately need quickly. 

Fund Your Child’s College Savings

If you are a parent, you might be interested in ways to pay for your child’s college education. Consider putting your tax refund in a 529 college savings plan.

As long as the money is used for education, you won’t be taxed on it. In some states, you might even be eligible for a tax break for your education contributions. 

With a 529 college plan, you can invest your money for added growth. This is a great way to achieve your savings goals for your child’s future college education. You can even set up recurring, automatic contributions as low as fifteen or twenty-five dollars each month. 

Image credit: Karolina Grabowska

Lending Club Review

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At a time when investors are making record low interest rates of little more than 1-2%, there is an opportunity to earn much higher returns through peer-to-peer investing with Lending Club.

And for would-be borrowers, the news is almost as good. They can borrow money from Lending Club investors at rates generally below those offered by credit cards. They can do so without putting up collateral and without all the red tape that comes along with borrowing from a bank.

Note: A few years back Matt used Lending Club to consolidate his debt and has been investing with them ever since paying off that loan. Over the last three years he has averaged an interest rate of over 10% on his investments with Lending Club.

What is Lending Club

Lending Club is a “peer-to-peer” lending company, matching borrowers directly with lenders.

The model removes banks from the process, enabling the borrower to pay a lower interest rate, and the investor to earn a higher rate of return. The company is the first peer-to-peer lending organization to be registered with the Securities Exchange Commission.

The company began operations in 2007 and has originated over $1 billion in loans.

According the company’s website, the latest statistics–as of November 23, 2012–include:

  • Loans funded to date: $1,348,306,700
  • Interest paid to investors since inception: $114,375,168

77.32% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards. Can I get an Amen?

How does Lending Club work

Both investors and borrowers can go to the Lending Club website, sign up and investigate the loan programs available, including loan requirements and grades, interest rates, terms and any other factors connected with the transaction.

Loans sizes range from $1,000 to $35,000 (the maximum loan amount), and are unsecured, personal loans. If a borrower is determined to be credit worthy, Lending Club assigns them a credit grade that determines the interest rate charged. Credit grades are determined by the borrower’s credit characteristics, including credit history and credit scores, loan amount and debt-to-income ratios.

Loan (or note) listings are provided on the Lending Club website that reveal the loan grade, loan amount, and loan purpose. Investors can choose loans to invest in from the listings, deciding, for example, what loan grades and interest rate terms they deem acceptable – then they can save the filters and use them later to find and fund more notes.

How investors benefit from Lending Club

According to the site, Lending Club has over 45,000 investors who have funded more than $1 billion in loans. And they have collected over $114 million in interest payments.

Lending Club Notes ($20,000 denominations) have a net annualized return that is determined by loan grade. For an A note, the net annualized return is 5.66%, ranging up to a G note with a return of 12.07%. The nominal average interest rate is 14.21%, with an average default rate 4%, and an average net annualized return of 9.64% (Matt is currently earning at 10.23%).

Lending Club itself makes money by charging a service fee to investors and a loan origination fee to borrowers, similar to points charged by a mortgage lender.

Investors start by opening a account with Lending Club and depositing their money. They then choose the loans they want, based on the expected rate of return on investment and the level of risk they’re comfortable with. Higher rate loans also carry higher risk, while lower risk loans offer lower interest rates.

How Borrowers benefit from Lending Club

Borrowers can borrow money through Lending Club for less than they’ll pay for most other loans. Since there’s no “middle man” in the Lending Club process, they can see a loan approval in less time and with much less documentation. Borrowers can get debt consolidation loans to pay off credit cards charging, say, 15% with a loan from Lending Club carrying a rate well under 10%.

Which is exactly what Matt did. He consolidated three credit cards and an auto loan, then paid it off in seven months.

Lending Club isn’t a “no other way” lender, and there are some stipulations that keep loans primarily to higher quality borrowers. According to the website, fewer than 10% of loan applications are approved. The credit standards are pretty stiff, with a minimum credit score of 660.

This is because Lending Club likes to deal with borrowers who are going to pay off the loans. Makes sense right?

Some statistics on the profile of the average borrower from the site:

  • 715 FICO score
  • 14.98% debt-to-income ratio (excluding mortgage)
  • 15.21 years of credit history
  • 68,831 personal income (top 10% of US population)
  • Average Loan Size: $12,159

Even with the high credit standards required by the program, Lending Club offers tangible advantages for borrowers who do qualify.

As mentioned above, 77.32% of Lending Club borrowers report using their loans to consolidate debt or pay off their credit cards. How cool is that?

Betterment Review

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The past few years have seen the rise of a number of specialized, online investment management services. One of the better programs out there is Betterment.

Betterment describes itself as “The fully diversified, automated, and smart investment account that helps you feel good about your future.” It offers a simple, efficient investment system that will appeal to a large number of investors.

How Betterment Works

Betterment uses a simple investment strategy that’s based on two investment options, referred to as baskets. One basket is made up of stocks and the other of treasury bonds. But rather than holding individual stocks, each basket is comprised entirely of a mix of exchange traded funds (ETF’s).

As an investor, all you need to do is set your portfolio allocation and the system handles your investing for you.

Unlike many online investing services, Betterment does not require a minimum opening account balance. If you open your account with less than $10,000 however, you will be required to make monthly deposits of at least $100 until the balance is achieved. Once you reach the $10,000 mark, continued monthly contributions are optional.

You can move money easily and automatically between your Betterment account and any outside accounts you have with next day transfers. The system also allows you to do investment projections online simply by changing asset allocations and projected contributions.

One of the coolest parts is that you can “try before you buy” so-to-speak by running savings goal scenarios before actually committing the money to those investment mixes.

Betterment will also give you $25 if you open and account with at least $250.

Betterment Pricing

In regard to investment fees, Betterment has no transaction fees, but charges a management fee based on portfolio size. There are three pricing tiers that determine the amount of the management fee:

  1. for accounts under $10,000 the annual percentage charged is .35% of the balance,
  2. for accounts of $10,000 and up to $100,000, the fee is .25% of the balance,
  3. for balances of $100,000 and higher the annual fee is .15% of the balance.

If your account balance is $100,000, your annual account management fee will be .15% of the balance, or $150.

This makes betterment one of the lower cost investment systems around, especially on accounts with higher balances.

Betterment Advantages

Pricing is an obvious advantage with Betterment. To be able to maintain $100,000 of managed investments for just $150 per year would be difficult to duplicate elsewhere.

Simplicity is another advantage. You can set your portfolio allocation between stocks and bonds and management will take it from there. You don’t need to actively trade, to follow your investment positions on a daily basis or to make changes.

Betterment also has professional management which saves you the time and effort that will take to become a successful investor. And rather than investing in stocks, management invests instead in ETF’s. That not only keeps trading expenses at a minimum, but it also achieves significant diversification within each asset class.

Management’s investment philosophy also seems very solid. The bond basket is invested in ETF’s that hold Treasury Inflation Protected Securities (TIPS) with maturities of three years or less. That minimizes interest rate risk that is inherent with longer-term bonds. This makes Betterment’s bond positions more secure than typical bond funds

The stock position is held in ETF’s that invest in value funds and small-cap funds. At this time the entire stock portion is held in US based stocks. Betterment holds the stock position in several ETF’s that are determined by management to best achieve the program’s investment goals for its equity positions.

Like many of the online investment systems available, your holdings in the account will be limited to Betterment’s baskets. You will not be able to hold individual stocks, mutual funds, or ETF’s as you would in a typical online brokerage account. Betterment is, after all, a managed investment account, and not a general investment account. This is how they keep it simple for you, the investor.

On balance, Betterment looks to be a good investment choice for most investors, particularly for those who are looking for aggressive equity investments, counterbalanced by conservative bond investments. And the cost and simplicity will be hard to beat anywhere.

You can get more information on how Betterment works, and take advantage of a free 30 day trial offer and the $25 bonus by visiting the Betterment website.