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.
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