You Have Your Tax Refund... Now What?

3/31/2017 - By Christina Doss, AAMS

The size of your refund is based on the amount you overpaid on your taxes during the year. Essentially you are allowing the government to use your money interest-free 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.     

So, you have your tax refund, now what? Everyone’s financial situation is unique, so what may be the best course of action for one individual may not be for another. 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. 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.) 

Spend/Reduce Debt:

  1. Pay off or pay down high interest rate debt. 

  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: 

Pay for home improvements; put refund aside to save for a vacation or for holiday expenses.   

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

About the Author | Christina Doss, AAMS
Christina is the managing director for Saltmarsh Financial Advisors, LLC, an affiliate of Saltmarsh, Cleaveland & Gund. She is responsible for business development, client wealth management and financial planning and has more than 25 years of experience working in the financial services and wealth management industry.

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