6 smart things to do with your tax refund

Doing your taxes? The worst. Getting your tax refund? The best. If you’re like most people, seeing your account balance spike up when you get that check from the IRS might make you feel like you’ve won the lottery. But really, that “extra money” isn’t free cash at all – it’s generally money you earned all year long that you’ve overpaid to the IRS. Consider reframing that tax refund from “free money” to part of your regular income.

So how can a one-time tax refund help you achieve your goals, whether it’s taking that vacation next year or retiring in 20 years? Here are six smart moves you can consider if that IRS check arrives.

Make a plan

It may be tempting to take your refund and splurge on a big purchase. But take a step back and think about how the money makes you feel. You may choose to pursue the mental calm of having put the money toward your future rather than the adrenaline rush of spending it. And it doesn’t have to be all or nothing – you can decide to set some of the refund aside, and still use part of it to treat yourself (after all, you worked hard for that money!).

Pay down some high-interest debt

Generally speaking, debt tends to grow faster than savings. So consider using your tax refund to pay off any debts, starting with those charging you the highest interest rates (e.g., credit cards) and moving toward lower-interest-rate debt (e.g., student loans). You may actually be increasing the value of your refund by avoiding the drag of those rates in the future.

Jumpstart your emergency fund

Experts generally suggest saving three to six months of everyday expenses stored away in a separate account. If you don’t have that already, consider using your tax refund to get started. Even if you start by saving just one week’s worth of expenses, knowing you have some money saved in an account that earns interest can help you gain the peace of mind you need to invest toward long-term goals.

Invest toward your retirement

Planning to retire down the road? Think about putting a portion of your refund toward your annual contributions to tax-advantaged retirement accounts. If you qualify for an employer-sponsored retirement plan like a 401(k), or if you can fund an IRA or Roth IRA, consider contributing up to the maximum if possible. You’ll likely thank yourself later.

Fund education

Have children? You can consider investing your tax refund in their education with a tax-advantaged account, like a 529. If you are making automatic contributions to your 529, adding your tax refund could be a welcome boost – and may help secure your child’s future.

Check your withholding

You might prefer to pay less tax during the year rather than receiving money back at tax time. Take a look at your withholding amount (and check with your tax professional). Make sure you don’t withhold too little from your paycheck; if you do, you might see your next tax bill go up or even incur penalties. What’s more, remember that everyone's situation is different, so consult with a tax professional to see if any of these strategies make sense for you and your financial goals.

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