Tax season is upon us! For many Americans, this time of year brings the hope of a tax refund. Each year, nearly 8 out of 10 people who file tax returns in the United States receive a federal refund.[i] Whether your tax refund has resulted from intentionally overpaying throughout the year or from unexpected tax breaks, now is the time to start thinking of how you can make the most of it.
Instead of immediately spending your refund, you might want to try one of these methods of boosting your savings and improving your overall financial health this spring.
Reduce Your Tax Burden with a Traditional IRA
Did you know that by using your tax refund to fund an IRA, you might be eligible for even more deductions on your previous year’s taxes? This may seem a little backwards, but placing your expected tax refund into a traditional IRA may allow you to deduct up to $5,500 for this tax year. If you are over 50, that limit goes up to $6,500.
The average tax payer received a $2,732 tax return in 2016.[ii] While this doesn’t meet the maximum IRA contribution, any amount will get you on your way to growing your retirement savings.
The unique aspect of this strategy for your refund is that it allows you to show a contribution to your IRA that you have yet to make. Using your refund in this way will allow you to deduct any contributions, therefore reducing your tax burden and providing you with the potential for an even greater refund. Open a Traditional IRA today to start reaping the tax benefits.
You can also ask your tax professional about how to put your refund into a traditional IRA at your local tax office.
Funding a Roth IRA with Your Refund
Another way to get the most financial benefit from your tax refund is to deposit it into a Roth IRA. Unlike a traditional IRA, a Roth IRA doesn’t provide you with immediate tax relief. The tax benefits from a Roth IRA come during your retirement when you are able to withdraw 100 percent of your savings without having to pay taxes on it.
The compound interest you earn in your Roth IRA will pay off in a big way when retirement rolls around. Look into your IRA options to find the account that will best allow you to meet your retirement savings goals.
Build an Emergency Fund
Are you financially prepared for a medical or employment crisis in your family? Most experts believe that you should keep enough money set aside to cover up to six months’ worth of living expenses, including your housing, food, health care, and debt.[iii]
If you aren’t the best at saving throughout the year, tax season can offer an opportunity to start building an emergency fund for your family. Placing your tax refund in a high-yield savings account or money market savings account can help you grow your emergency funds quickly through interest compounded daily.
The key to an emergency fund is having money that is easily accessible in a crisis. Because of this, you will want to avoid depositing money you set aside for emergencies in stocks, mutual funds, or a certificate of deposit to ensure you can access your money when you need it.
No matter how you invest your tax refund, focus on making this the year you improve your financial health. Put your tax refund to its best possible use today!
For further information about any of the financial options described in this article, please feel free to contact a Bank of Internet USA banking specialist by calling 1-877-541-2634 or emailing us at email@example.com.
[iii] “What’s the Right Emergency Fund Amount?” Vanguard. https://investor.vanguard.com/emergency-fund/amount
"Have You Considered How You Can Make the Most of Your Tax Refund?"
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