Make the most of your tax refund
If you’re like most Americans, you’re eagerly anticipating your tax refund every year. Learn four ways to use your refund to your advantage.
Pay off high-interest debt
If you receive a tax refund, paying off high-interest debt - such as credit card debt - should be your top priority. Paying 12% interest or more on a credit card balance puts a serious dent in the amount you can save toward other financial goals.
If you don't have credit card debt, but do have a car or a personal loan, consider using your refund to pay down that balance. Lowering your debt will likely improve your credit score, which means you'll probably qualify for a lower interest rate the next time you apply for a loan.
Start a retirement account
Saving for retirement is one of the top financial worries, with some experts estimating you’ll need near $1 million, 80%-90% of your pre-retirement income, or 12 times your pre-retirement salary.
To stay on top of retirement saving, consider using part of your tax refund to open an Individual Retirement Account (IRA) at your bank. At any age, you can contribute up to $6,000 to a Roth IRA if your adjusted gross income is:
• $129,000 to $144,000 – Single taxpayers and heads of household
• $204,000 to $214,000 – Married, filing jointly
• $0 to $10,000 – Married, filing separately.
If you’re ages 50 and older, you can add $6,500 per year in catch-up contributions. The type of IRA you select depends on your financial circumstances, including whether you’ll be in a higher tax bracket now verses in retirement. View the full contribution limits on the IRS website.
Contributions to a traditional IRA are tax deductible, but you'll pay tax on your withdrawals during retirement. Roth IRA contributions aren't tax deductible, but when you retire, you'll receive tax-free withdrawals.
Want to max out your IRA contributions for last year? You can still earmark contributions for the previous tax year, as long as you make them by tax-filing day.
Invest in the stock market
You may be wary of getting involved in the stock market. But consider this: if you look at 20-year time periods, the stock market has ended higher than it started. If you invest now, you'll be able to benefit when stock prices rise. To make the most of your investments and be sure your strategy is on track, it’s best to work with a qualified investment advisor.
Save for your children's education
To help with a child’s higher education costs, states have created 529 college savings plans to help you save for education costs. Your contributions to the investment account will grow tax-free, provided you use the proceeds for qualified educational expenses.
But don't put your whole tax refund toward your children's college expenses unless you've already maxed out your retirement savings. Children have more time to pay off college debt; you have a much shorter time to save for retirement.
Don't get a refund
Getting a refund feels great, but it also means you're giving Uncle Sam a no-interest loan. Consider adjusting your withholding amounts on your W-4 so you don't get a refund next year. The IRS's Withholding Calculator can help you determine how many exemptions you should claim. Then you'll be able to put a little extra from each paycheck into an interest-earning savings account.
The information provided in these articles is intended for informational purposes only. It is not to be construed as the opinion of Central Bancompany, Inc., and/or its subsidiaries and does not imply endorsement or support of any of the mentioned information, products, services, or providers. All information presented is without any representation, guaranty, or warranty regarding the accuracy, relevance, or completeness of the information.