8 Smart Ways to Invest your Tax Refunds

By Garry S. — Published April 09, 2018

8 Smart Ways to Invest your Tax Refunds

The revenue earned via a tax refunds are an excellent opportunity for further investments. The average tax returns for the previous year came to a total of $2,900. This presents a big opportunity to enhance your financial plans. Read on to know about the various avenues in which your tax refunds could be utilized.

1. Pay off your credit card debt
For those having high-interest-rate credit card debt, this should be your first target. This is because your returns are equal to the interest rate. It is a risk free investment and saves money in the long run. You can also use your returns to pay your other debts like auto loans, student loans and mortgages on homes. It is advisable to pay off your mortgage before you retire as interest rates on mortgages are around 3-4% and are tax deductible.

2. Increase your 401K deposits
It is wise to increase your 401k contributions with your tax refunds along with using it for everyday expenses. You can significantly increase your pre-tax income if you are investing in your retirement funds.

3. Create a back-up for emergencies and future expenses
Unforeseen expenses like medical expenditures, accident funds, and relocation expenses can be harsh on your wallet if you have not planned for it. Having liquid cash for such emergency conditions will put less pressure on your credit card. Even though the returns on savings are low, it is smarter in the long run to have an emergency stash.

4. Increase the down payment on your home or its resale value
Putting your tax refunds for the down payment of your home can greatly reduce that expensive mortgage. On the other hand, if you are already a house owner then it is a good idea to take on a home improvement and repair project. It will not only make your house more hospitable but also increase its resale value.

5. Invest in HSA
Health Savings accounts are one of the best places to invest your tax returns as they are triple tax free. This means that capital flows into HSA pre-tax as deducted from the paycheck. The money in the account grows tax free and it is non-taxable upon withdrawal as long as it is used for medical purposes. After the age of 65, withdrawals not used for medical reasons are treated like your 401k and are taxed at the current income tax rates.

6. Invest in various markets
There are various investment opportunities available like real estate, start-ups, stocks and bonds. Since there is always an element of risk in any investment, you should bank on your tax returns instead of dipping into your savings account.

7. Make contributions to an IRA
If you are not already planning for your retirement, then you should definitely start doing so. This should be your first stop in planning for the late ages. There are two kinds of IRAs available, traditional IRA and Roth IRA. Traditional IRA in double tax-free, meaning that you get tax deductions for putting in money and it grows tax-free. However, income tax is charged while withdrawing the money. In case of Roth, there are no tax deductions, when you use the account after retirement, you withdraw without any tax. There are also no mandatory withdrawals which means that the funds can be passed on to the coming generation.

8. Make a charitable donation
This should be your last stop. If you want to make a difference in someone’s life or the world, then you should consider making a charitable donation. Before doing so, enquire thoroughly about the organization’s functions and finances. Get a clear picture of how your funds will be utilized to make the world a better place.

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