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Smart Ways to Use Your Tax Refund

Thomas Stapp

March 8, 2018

If you’re one of the taxpayers who will be receiving a refund, it is likely that you now have a sum of money that you had not accounted for. The IRS has reported that the average refund is $3,120. For a lot of people that is a decent sum of money. There are a lot of things you can do with $3,000, some smart and some not so smart. Well, here are some ideas I have for how to put that money to use in a beneficial manner.

Put it in a Roth IRA account

As most people know, one of the best ways to invest is through a Roth account. The current tax code allows Roth accounts to grow without any tax liability. If your income is below the phase out threshold, there is a good chance that the Roth is the most beneficial investment vehicle to use. One thing that most people don’t know is that for 2017 you have until April 17th of 2018 to fill up your Roth contribution amount for 2017. If you are under age 50, the most you can contribute to a Roth account each year is $5,500; $6,500 if you are 50 or older. This means that if you haven’t contributed the max amount to a Roth account for the prior year you have until April 17th to do so. If everything else is accounted for, this is likely the best thing you can do with your refund. If you want to know more, it would be a good idea to contact a tax professional.

Build up an emergency fund

Statistically, most Americans have less than $1,000 saved at any given time. If you don’t need to use your refund money on something that is already overdue, it might be a good idea to simply add it to your emergency fund. It is recommended that you have an emergency fund that will cover 3-6 months of living expenses. It is much better to use saved funds when something comes up rather than having to plunge yourself into debt.

Decrease your debt

If you have a lot of consumer debt, you are likely paying an interest rate that is higher than you could get with most investments. Paying off either all or a portion of consumer debt will save a lot of money in the long run.

Home/car repair or maintenance

If you’ve been putting off any repairs or maintenance around the house or on your car due to financial reasons, a tax refund could be just what you need. Some problems, like a leaking roof, can lead to bigger issues if not fixed – the same goes for cars. Money from a refund could be just what you need to take care of any minor problems to make sure they don’t lead to anything bigger.

Put it toward a vacation

If you were wanting to go on a vacation, a tax refund is a good way to get your vacation fund shifted into gear if you hadn’t already started saving.

Regardless of what you do, just make sure you think it over before you pull the trigger. A lot of people succumb to impulse decisions when they get their refund. If you are not planning on putting your refund money in a Roth account, a good rule to follow would be to wait two weeks or longer before you touch it. This will give you enough time to think over what you can best put the money toward, and it will likely prevent any impulse purchases.


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