The tax filing deadline for the 2016 tax year was April 18. That was about six weeks ago and while people hate writing additional checks to the IRS, many people actually received a refund back from the government. According to statistics released by the IRS in 2016, the average refund received was just shy of $3,000 for the 2015 tax year. While it may be tempting to go out and splurge with that money, think about some alternative ways to put your refund dollars to work.
An emergency fund
You know the feeling when you turn your car on and the “check engine” light comes on? Usually the first two thoughts that come to mind are, “well this can’t be good” and “how much is this going to cost me?” It is for times like this that we stress the importance of having an emergency fund set aside to pay for unexpected expenses that come up or you find yourself in-between jobs. If your emergency savings are running low or you don’t have any, consider using a portion of your refund toward this goal.
Pay down consumer debts
June is the start of wedding season. Maybe you’ve been invited to one or two, each of which requires you to travel to the venue, pay for hotels, buy a new outfit, and bring a wedding gift. Before you know it, your credit card bill has ballooned and you haven’t paid it off. Now you have interest accruing on the balance. If you have outstanding credit card debt, consider paying down the balance with your tax refund.
Make an IRA contribution
Are you the person who is trying to get their IRA contribution in at the last minute before the tax filing deadline? Consider using part of your tax refund now toward an IRA contribution for the 2017 tax year so you’re not racing around at the last minute trying to 1) come up with the money for your IRA contribution and 2) get the money to your IRA custodian by the proper deadline. Just remember that you must have what the IRS deems to be “taxable compensation” (i.e. money earned from employment) in order to make an IRA contribution. There are several other rules to follow regarding how much you can contribute per year, whether you are eligible to contribute to a Roth IRA or not, or whether or not your contributions to a traditional IRA would be deductible or not. If you have questions, seek help from a qualified professional.
Children’s college fund
If you’ve been putting off starting a college fund for your child, consider opening one up and using part of your refund as seed money. Work with a qualified professional who can walk you through the types of accounts that are available and the pros and cons to each.
Lastly, spend a little on yourself
While we have spent this article giving examples of ways to save your tax refund, it’s OK to splurge every now and then. If you’ve been diligently paying down debt and building up an emergency fund throughout the year, maybe a portion of your tax refund could go toward a dream vacation you’ve been wanting to take.
Remember that a tax refund is not a gift from the government. It is simply a return to you of your own money that you over deposited throughout the year through tax withholding or estimated payments. If your refund is consistently large, it would be a good idea to evaluate how much you are withholding versus how much you are likely to owe and make adjustments accordingly.
Gary E. Croxall, CFP®
Soren E. Croxall, CFP®
Croxall Capital Planning
Securities and Advisory Services offered through National Planning Corporation (NPC), member FINRA/SIPC, a Registered Investment Advisor. Consulting and Investment Management offered through Croxall Capital Planning (CCP), a Registered Investment Advisor. CCP and NPC are separate and unrelated companies. NPC and CCP do not provide tax or legal advice. The information contained herein is for general education and is not intended as specific advice or a recommendation to any person or entity. The opinions expressed in this article do not necessarily reflect those of NPC.