By Peter Mastrantuono
The average tax refund in 2018 was $2,869, according to Bankrate. With the 2019 federal income tax season now underway, millions of Americans can expect to receive a tax refund, begging the question, “How can I best put this money to use?”
The answer to that question, of course, depends upon your own set of circumstances, but here are some top ideas to consider.
- Pay off those high-interest credit card debts. With interest rates of 16% or higher and an inflation rate of about 2%, outstanding credit card debt is the chief obstacle to improving personal financial security. Once you get rid of that debt, put the credit card in a dresser draw (or better yet, cut it up) so that you’re not tempted to spend your way into new, expensive loan balances.
- Deposit the refund into your emergency fund. If you do not have an adequate savings reserve to meet unexpected large expenses or to pay for 3-6 months of living expenses in the event of a job loss, then depositing your refund into a bank or money market account separate from your regular accounts may make the most sense.
- Fund a traditional or Roth IRA. If you’re behind in saving enough for your retirement, consider using the refund to make a 2020 contribution. Contributed funds will grow tax-deferred, and in the case of a traditional IRA, it will provide a tax deduction to reduce the taxes you’ll owe in 2020.
- Contribute to a 529 plan. If you have young children, a 529 plan is a tax smart way to fund future educations expenses. Contributions grow tax-deferred, and earnings will not be taxed as long as you use them to pay for qualified education expenses. Contributions are not federally tax deductible, but many states offer full or partial tax deductions at the state income tax level.
- Fund a Health Savings Account (HSA). Provided you’re eligible to contribute, contributions are tax deductible and distributions to pay for qualified medical expenses are tax-free. Since a significant expense in retirement is health-related, an HSA is a smart way to create tax-free retirement income and extend the life of your retirement savings.
- Make a difference. Use your refund to help a cause that’s important to you. One interesting way to change lives is through Kiva, an organization that facilitates loans to subsistent small business owners and farmers around the world. As a donor you select to whom you want to provide loans. When the loans are repaid, they can be re-loaned over and over again, amplifying the number of lives you can positively affect with your one tax refund.
A financial advisor can be valuable in helping you make the most of your tax refund since he or she has important insight into your financial objectives and how to best achieve them.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.