In 2017 the average taxpayer received a tax refund of $3,138. How do you normally spend your tax refund? Do you pay off debt, save for retirement, or spend the money on everyday expenses? With the tax deadline behind us, it’s a good idea to have a plan for your tax refund.
While it might be tempting to spend it, here are five smart ways to spend your tax refund:
Pay Down Debt
Not all debt is created equal. The right kind of debt can help you acquire capital and invest in yourself. The wrong type of debt can weigh heavily on your life and financial situation. Use your tax refund to help pay down these two debts:
Credit Card Debt
There is no bigger anchor to your finances than credit card debt with compounded high interest accruing every month. Use your tax refund to pay down or eliminate your credit card debt if possible.
Student Loan Debt
Although student loan debt isn’t as bad as credit card debt it’s hard to build your net worth while still paying off student loans. Use a portion of your refund to pay extra towards principal and pay off student loan debt faster.
Open or Contribute to a Roth IRA
Another great way to spend your tax refund is to invest in your future and start saving for retirement. While employee sponsored 401K’s might be more popular, IRA’s are another great investment vehicle.
Roth IRA’s have tons of benefits and can be paired with a 401K to save for your future. With a Roth IRA, you contributions are post-tax and will not be taxed again in the future. The annual contribution limits are $5,500 if you are under 50 years old. For anyone over 50 years old you are allowed an additional $1,000 annually. The only downside is that you might be above the income requirements in which you would need to contribute to a traditional IRA.
Open a 529 College Saving Plan
A 529 college saving plan is a great way to fund your children’s future education costs. The savings plans work very similarly to a 401K or IRA. Your contributions are invested in mutual funds, target date funds or similar investment options. The best part is that withdrawals from 529 college savings plans are tax-free if used for tuition, room, and board, or other college-related expenses.
Start a Side Business
If you’ve had a passion project but hadn’t started this is a perfect time. With the internet, apps, and low barriers to entry it’s never been easier to start a business online. Use some or all of your tax refund to pay for start up costs, resources, and coaching. Not only will you enjoy the challenge of starting something new but you can also earn more money. Depending on the start-up costs and income produced it can also be a great tax deduction in the future.
Create a Lasting Experience
While all of the options are great ways to spend your tax refund it’s okay to spend it on a fun event. Instead of spending it on a shiny new object or fancy dinner use the money on an experience that will last longer. Use your tax refund to go on a new vacation, cross something off your bucket list and create a memory that will last forever.
If you have any questions about how to best utilize your tax refund, request a call from a Bayntree financial advisor today.
Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.