Four ways to put your tax refund to work for you

Four ways to put your tax refund to work for you

With an average tax refund totaling more than $3,100 this year, many taxpayers are choosing to save or pay down debt.

As of February 26, nearly 46 million tax refunds totaling $142 billion have already been issued, according to the Internal Revenue Service. The average tax refund this year is $3,164, reflecting a 0.2% increase over last year.

Most taxpayers are expected to save their refund or pay down debt rather than spend it on shopping or vacations — marking the highest percentage of saving since 2007 according to an annual survey by the National Retail Federation. About 50% polled expect to save the funds, and 35% will use it to pay down debt. In addition, 22.4% said they plan to use the money for daily expenses, while only 11.4% hope to book a vacation and 9.2% plan to spend it on a major purchase like a car.

An influx of extra cash can also create an opportunity to contribute to retirement savings or other priority saving goals.

Here are some ideas for investors who may want to save more for a rainy day or fund their retirement.

1. Pay down debt.
Depending on their financial situation, this could include credit card debt or college debt. Borrowing is on the rise. In its most recent report, the Federal Reserve found that non-revolving credit including student and car loans, as well as revolving, or credit card debt, rose.

2. Fund a Roth IRA.
While contributions to a Roth IRA are not tax-deductible, interest earned, as well as withdrawals in retirement, are tax free. Roth IRA accounts can also help savers establish tax-diversification among retirement assets, which can be used as a tax-smart strategy in retirement.

3. Boost an emergency fund.
An emergency fund is an account that can be accessed easily to cover regular monthly expenses in case of emergency, such as a job loss. In addition, it can be helpful to have extra savings for an unexpected car or home expense or health-care bill. Opinions vary on how much to save. A professional advisor can help set a goal for this account, depending on an individual’s financial situation and ability to save.

4. Fund a 529 college savings plan.
Anyone — including parents, grandparents, aunts, uncles, and friends — can contribute to a 529 college savings plan on behalf of a child. There are no limits on contribution amounts. A 529 college plan offers tax-advantages for students, as earnings grow tax free and are not taxed when withdrawn for qualified higher education expenses.

For investors expecting to receive a refund this year, tax-filing season is an opportune time to consider taking that extra cash and investing it in the future.


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