You Have Your Tax Refund... Now What?

4/19/2022 - By Christina Doss, AAMS

This blog has been updated on 4/19/2022 from its original publishing on 3/31/2017.

The size of your refund is based on the amount you overpaid on your taxes during the year.  If you pay in less, your take-home pay will be greater. Essentially you are allowing the government to use your money during the year but for those who are not disciplined savers they may be better off overpaying the government and realizing a refund at the end of the year. For some, it can be a good way to “force” savings.     

Everyone’s financial situation is unique, so what may be the best course of action for one individual may not be for another.  So, what do you do if you receive a refund? Generally, you can Save, Spend or Gift it. 

Save:

  1. Build an emergency savings fund if you do not have one already. Planners typically advise having 3-6 months’ worth of expenses readily accessible in case of an emergency.  
  2. Contribute to a Traditional or Roth IRA. Contributions to a traditional IRA may be deductible, depending on your income but contributions to a Roth are not.  Traditional IRAs provide for tax-deferred growth while Roth’s offer the added benefit of tax-free withdrawals. Contributions to IRAs can be combined with contributions to an employer-provided plan to maximize retirement funding. (Rules regarding IRAs can be complex so speak with a tax advisor regarding eligibility.)
  3. Build your wealth. Use your tax return to invest in stock and bond funds through a taxable brokerage account. Though you are required to pay taxes on the growth of these accounts each year, they are typically taxed at a lower rate than income. You can add or remove money from the account at any time which makes them a great option for pre-retirement savings goals, like buying a home or a boat.   

Spend/Reduce Debt:

  1. Reduce Debt. Pay down (or pay off) high-interest rate debt or high-balance credit cards. Now is also a good time to reduce your student loan balance, as many student loans are still charging 0% interest due to the pandemic. This means 100% of your payment is applied against your outstanding balance, rather than a portion being paid in interest.   
  2. Make an extra payment towards your mortgage for the year if your mortgage company or bank allows for early repayment without penalty and will apply that payment to the principal balance.  
  3. Apply your refund towards next years’ tax bill. 

Gift: 

  1. Gift money to a child or grandchild through a 529 plan for a college education. Withdrawals for qualifying educational expenses are tax-free.  
  2. If you are charitably inclined, make a contribution to a charity. In addition to supporting your community, you may receive a tax benefit for your efforts if you itemize.

Other common uses for a tax refund: 

  1. Pay for home improvements.
  2. Put refund aside to save for a vacation or for holiday expenses.

Don’t want to receive a refund?

Instead of receiving a refund at the end of the year, consider decreasing your tax withholding rate and direct income to an employer-provided retirement plan, if your company offers one. Contributions decrease your taxable income. You may receive the added benefit of an employer match. 

A tax advisor or planning professional can assist in determining the best options for you. If you have any questions, contact a member of our Tax Consulting Team or Financial Advisors Group.

About the Author | Christina Doss, AAMS®

Christina is a shareholder in the Investment Advisory Services practice of Saltmarsh, Cleaveland & Gund. She is also the managing director of Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. She is responsible for business development, client wealth management and financial planning and has 30 years of experience working in the financial services and wealth management industry. Prior to joining Saltmarsh in August 2013, she served as Pensacola city president and managing director of Private Wealth Management for the North Florida Division of SunTrust Bank where she was responsible for managing a team of advisors who supported high net worth clients and business owners with comprehensive wealth planning, asset management and banking needs. Her previous experience also includes 13 years with Charles Schwab Corporation serving in several capacities, including senior director for Schwab’s West Coast Private Client Division responsible for managing over 100 portfolio managers and $8 billion in client assets and senior sales director for Schwab’s national Financial Planning Division.

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