It’s unusual to be talking about tax refunds at this time of year. But due to the unusual circumstance created by the COVID-19 pandemic, the tax filing deadline was extended until mid-July. Therefore, many people are now just receiving their refunds.
So how can you make the most out of this year’s tax refund? A good option may be to apply it toward helping you achieve your key financial goals. Here are five ways you can make a meaningful impact with it:
#1 – Build up your emergency cash reserves
In these uncertain times, it is more important than ever to have cash available when you need it. This is especially true if your household income is subject to fluctuation due to job instability created by today’s challenging economy. It’s generally recommended that you have three to six months of household income set aside in a savings or money market accounts where cash is readily accessible.
#2 – Pay off debt
You can use your refund to reduce your debt load, such as credit card borrowing, student loans or even your home mortgage. This will help reduce interest costs and bring you closer to retiring these debts, which can be a burden to your monthly cash flow.
#3 – Boost retirement savings
If you could put this money to work for your future, a good place to start is to add to your retirement accounts. If you have not fully funded an IRA for this year, applying your tax refund for that purpose could be beneficial. Every $1,000 in funds you add to your IRA now will grow to more than $7,600 in 30 years assuming you earn an average of 7% per year.
#4 – Add to college savings
If you are still trying to build a fund to help with college costs for yourself or your children, your tax refund can provide a boost. Be sure to consider establishing a 529 college savings plan if you haven’t already. It can offer the ability to generate investment earnings on a tax-deferred basis, and all distributions used to fund qualifying education expenses are tax-free.
#5 – Fund a business startup
For those with an entrepreneurial bent, a tax refund can provide seed capital to help underwrite business startup costs or act as a financial cushion as you get started.
If you regularly receive a large tax refund, you may want to adjust the withholding on your paycheck. Decreasing your refund may increase your monthly net pay, allowing you to allocate extra income each month to your financial goals. This strategy isn’t right for everyone. Consult with your tax attorney and financial advisor before making adjustments or decisions on how to use your windfall.
Andrew R. Petty, CRPC®, APMA®, CLTC®, is a Private Wealth Advisor with Nona Wealth Advisors, a private wealth advisory practice of Ameriprise Financial Services, Inc. He offers fee-based financial planning and asset management strategies and has been in practice for 19 years. To contact him, please call 407-249-4006, visit his website at https://www.ameripriseadvisors.com/team/nona-wealth-advisors or stopover at his office at 10917 Dylan Loren Circle, Suite A, Orlando, FL 32825.
Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.
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