Best Ways to Use a Tax Refund

A young couple is excited when they receive their tax refund. Antonio Guillem/Shutterstock

By the first of May you have either received your tax refund or are checking every day to see if it has been deposited to your account or is in your mailbox.

If you have not decided on how to use the refund, here are some suggestions on how to take advantage of this money. You will note that “spending’’ is not the first option offered.

Save It

It is estimated that 71 percent of Americans have a savings account. If you are among that group, you can add the refund money to it. Unfortunately, because of extremely low interest rates over the past two years, savings accounts do not accrue much, if any, interest. If you just want to put it into an account for safekeeping, use a savings account as a possible repository.

If you want to lock your tax refund away where you can’t touch it without severe penalty, you can open a Certificate of Deposit (CD) account. CD accounts hold your funds, which earn a slightly higher interest rate, for a defined period of time (you can buy CDs for three or six months, or one, two, or five years. Taking money out of a CD before its maturity date will cost you; the penalty is tied to how many months remain before the maturity date of the certificate.

There are also high-yield savings accounts, usually offered by online banking services. These accounts offer slightly higher interest yields, but, again, as of May 1, 2022, the interest rates on these accounts is below one percent annually.

The goal with any of these savings accounts is to put the money away and keep it so it can accrue interest over time. If you think you are going to need the funds in the near future, a simple savings account has no penalty for withdrawal.

Pay Off Debts

Since your debt level impacts your credit score, your credit score impacts almost every financial decision you make. Adding more debt in the form of a mortgage or automobile loan will be more expensive based on how much debt you already have. So, using your tax refund to reduce your debt is a smart move for future considerations.

Compile a list of your current debts, including student loans, car loans, credit card balances, to determine which is being charged the highest interest rate (most likely your credit cards). Then pay down some of that debt. Your credit score will improve as a direct result.

If you are struggling with debt, you can use your tax refund to pay it down. Dean Drobot/Shutterstock

A Retirement Account

Retirement accounts funded by paycheck withdrawals are automatically deposited. However, if you have taken out an Individual Retirement Account, perhaps because your employer does not offer a 401(k) plan, you can contribute your tax refund check to it.

There are two positive reasons to consider this move. You are putting money into an account that is accruing interest in order to have a decent income in retirement, and you cannot touch those funds once you put them in the IRA without significant tax penalties. Therefore, you are unlikely to try to retrieve those funds, making them safe from a sudden desire to make a large purchase. You can feel good about your decision.

A College Fund

Whether you are planning to pay your child’s or grandchild’s college expenses, starting or contributing to a college fund is another good way to use your tax refund. Because it is money earmarked for the future of your offspring, you are unlikely to take that money out for an impulse purchase.

There are several types of college funds. One of the most popular is the 529 plan, which accrues interest on contributions and doesn’t tax withdrawals that are directed to an accredited college or university. There are similar prepaid tuition plans in many U.S. states, but those funds must be used for in-state schools.

The Stock Market

If you have always wanted to own a particular stock but have never dabbled in the stock market, you can use your tax refund for that purpose. If you have any retirement accounts or 401(k) accounts, you are already invested in the stock market, likely in mutual funds, as determined by the account administrator. But, if you always wanted to have shares in McDonald’s, for instance, you could buy them with your tax refund.

Use your tax refund to invest, can generate profit that can be used in future. Romolo Tavani/Shutterstock

A Career Change

Depending on the size of your tax refund, you could put that money to good use in a relatively meaningful way.

If your career is stalled, or if you could benefit from an additional community college class or two to advance your career, use your tax refund to enrol in an academic class. Most community colleges have programs aimed at career advancement. You have been waiting for the right time to enrol and attend such classes, and with the increased use of remote learning, it is easier than ever to earn an additional degree or certification. If such an addition to your resume would put you in position for a higher-paying job or a raise at your current workplace, consider investing in yourself with your tax refund.

Just Fun Money

You received a tax refund because you paid too much tax in the previous year, as determined by the federal tax code. So, it is, in fact, your money. That it comes to you in a lump sum gives you an opportunity to use it in a unique way, depending on your current life situation.

If you need a vacation, use your tax refund to fund a getaway. If you need money for your future, put your tax refund into an account that will accrue interest. If you really want to buy a motorcycle, then go and buy a motorcycle.

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.