With tax season here, many individuals are looking forward to receiving a tax refund soon. However, while it is nice to spend the extra funds on vacations and material things, reinvesting your wealth into your retirement savings, contributing to your bills, or updating important legal documents might be the more important route. Here are a few suggestions on what to do with this money:
1. PREPAY MORTGAGES AND LOANS. This might seem like a huge commitment in the beginning, but it can be worth it in the end, depending on what your needs are. In this case, it is best to consider where you stand financially. If you have recently downsized to a smaller home with your spouse, you may want to use your tax refund to get a head start on paying off your mortgage, which may be one of the largest expenses you owe every month. In addition, think about any outstanding loans you have.
2. REINVEST IN YOUR HOME BY MAKING HOME IMPROVEMENTS.This is a great step to take if you are aiming to sell your home in the near future. After all, remodeling can increase your resale value if done correctly. Also, keep in mind that certain home improvements can be tax-deductible, so consider this as you begin to plan which changes you want to make.
3.INVEST IN YOUR CHILD OR GRANDCHILD’S EDUCATION. Although paying off your own expenses is nice, you might also want to think about contributing to your child or grandchild’s college fund while you have the ability to do so. One of the tax planning strategies we suggest to our clients is utilizing a tax-advantaged 529 plan, which will give you the ability to pre-fund an education with $70,000. With a 529 plan, your money can also grow tax-free as long as the money is used for tuition. Keep in mind that if your child or grandchild chooses not to pursue a college education, you still have control of these funds.
4. PAY OFF HIGH CREDIT CARD DEBT. The U.S. credit card debt has reached $930 billion, and many individuals are having a difficult time meeting their payments. With that being said, consider using your tax refund to help pay off some of your debt, especially if your card has a high-interest rate. If you own multiple cards, spend time going through each one to see what you owe. It is incredibly important that you have a plan on how to pay off this debt instead of letting it sit for months and months.
5.PUT MONEY AWAY FOR EMERGENCIES. If you are still working, you are probably already taking advantage of an emergency fund. If not, make this a priority! Increase your dollars in this area by utilizing some of the money you received from your tax refund. It is better to be prepared now for an emergency than to worry later.
6.INCREASE YOUR 401 (K) CONTRIBUTION.As you may already know, contributions made to a 401 (k) are all done on a pre-tax basis. This is also true of pensions, IRA’s, 457 plans, 403 (b) accounts, and profit-sharing accounts. Because the money in a 401 (k) account is contributed on a pre-tax basis, your taxable income is reduced. Furthermore, you should contribute as much as you can to this retirement savings account. This year, you can contribute up to $19,500. With that being said, discuss with your employer what percentage of your salary they will match, and try to meet this amount. If, for good reason, you have reached the contribution limit, consider investing your tax refund into your IRA or another retirement savings account.
7.CONTRIBUTE TO YOUR IRA. According to a 2020 TD Ameritrade report, one out of five Americans in their 70’s has less than $50,000 saved for retirement. While it is recommended that you contribute what you can to your individual retirement account (IRA) every month through earned income, some individuals may find this to be challenging, especially if you have outstanding balances that require your attention. With your next tax refund, think about using it to fund your retirement.
8.CONTRIBUTE TO YOUR HEALTH SAVINGS ACCOUNT. A health savings account (HSA) is an excellent way to put aside your funds (pre-tax) in order to pay for your medical bills. Knowing how expensive hospital visits and doctors’ appointments are, this could be a great option. If you currently invest in one, consider adding some of your funds here. According to healthcare.gov, for the 2020 year, the maximum amount of money you can contribute is $3,500 for self-only coverage, and a maximum of $7,000 for family coverage.
9.CREATE OR UPDATE YOUR LEGAL DOCUMENTS.Surprisingly, only 47.9% of adults age 55 or older have estate planning documents. With that being said cost may play a factor; there is often a hefty fee associated with updating or establishing essential legal documents such as a living will, power of attorney, and medical directives. For example, if you are creating a will for the first time with the help of a lawyer, you may be paying between $300 and $1,000. If you have the extra funds to spare from your tax return, consider making this a priority. These documents are not only beneficial for you to have, but they are also beneficial for your family.Stay open-minded. With that being said, these six points are just a few common suggestions, so do not only stick with these if you have other ideas for how to utilize your tax return funds. Everyone has different needs, and it is important that you consider this when it comes to helping yourself and your family. Let us know what you think about these tips in the comments below. Also, how have you reinvested your tax-return before? What advice would you share with others when it comes to this topic? If you have further questions about how to protect your home, spouse, and life savings… attend a FREE discovery workshop by calling 1-800-964-4295 (24/7) or visit DSullivan.com – Reservations Required.