Use your tax refund to reach your financial goals

Consider these 7 ways to make your tax refund work for you.

A tax refund provides you with an unearmarked amount of cash, offering a unique opportunity to advance your financial goals. However, with life’s many competing priorities and unexpected expenses, determining which financial goals take precedence can be a challenging task.

We will help you leverage your tax refund for more impact, considering your overall financial goals.

Here are seven ways to use this money wisely:

1. Pay down debt faster

By using your tax refund to accelerate your debt repayment schedule, you can reduce the amount you pay in interest and help gain a better sense of well-being. Whether it’s a student loan, auto loan or a mortgage, if eliminating debt is your goal, consider how your tax refund can help you tackle debt more efficiently. For example, if you have multiple loans, you may want to allocate your refund to the debt with the highest interest rates, first. This strategy, known as the avalanche method, reduces the total interest you pay on your debts — and the amount of time it takes you to get out of debt.

2. Revisit your cash reserve

A cash reserve is a pool of money set aside to pay for unexpected expenses such as a major home or auto repair or household needs in the event of a job loss. Instead of prematurely liquidating investments or using credit cards, a cash reserve helps ensure that your progress toward your financial goals isn’t disrupted by unexpected events.

Generally, a cash reserve should cover three to six months of essential expenses. So, if your savings is below this mark or hasn’t kept pace with inflation, consider using your tax refund to add an extra layer of protection.

3. Boost your retirement savings

When invested into your retirement accounts, a lump sum (like a tax refund) can help keep you on track for your retirement, while also providing a quick boost to your portfolio. For example, if you have a 401(k) or an IRA, you may consider whether the refund makes it possible to max out your contributions for the year. Or, if you’re under the income limits and it makes sense for your situation, it may be worth it to use the tax refund proceeds to fund, or contribute to, a Roth IRA.

Advice spotlight

If your tax refund is exceptionally large, consider adjusting your withholding amounts for the next tax year. 

While a tax refund can be a nice windfall, it’s effectively a no-interest loan to the government. By adjusting your withholding amount accordingly, your return will be smaller, but your paycheck will be bigger, allowing you to allocate the extra money toward your financial goals throughout the year.

4. Set aside money for a loved one’s education  

If saving for education is a goal for your family, a tax refund can help you start, or continue to, invest in your child’s future. For tax advantages, consider storing this money in a 529 plan and name your child as the beneficiary. As long as the funds are eventually spent on qualifying expenses like tuition and supplies, withdrawals are tax-free.

5. Fund future medical expenses

If you are anticipating a major medical expense, such as an elective surgery or the birth of a child, a tax refund can help you proactively set aside money for those events. Here are two tax-efficient ways to save this money:

  • Health savings account (HSA): This account allows you to put pre-tax funds aside to pay for qualified medical expenses, with the option of investing the contributions to earn returns over time. HSAs are only available to those with high-deductible health plans (HDHP), but they offer unparalleled tax advantages for those seeking to save for their health care needs.
  • Health flexible spending account (FSA): Many employers offer this type of account to employees with low-deductible health care plans. FSAs allow you to put pre-tax funds aside to pay for qualified medical expenses, but only allows a limited amount of unused funds to carry over to the next year.

6. Pursue investing opportunities outside of retirement

If you plan to max out your retirement accounts for the year and have goals to grow your investment portfolio further, you may consider other opportunities to make your money work for you. For example, you may consider whether to use your tax refund to invest in stocks and bonds, mutual funds or in real estate. Wherever your interests lie, we will help you determine what type of investments are appropriate (considering your risk tolerance and time horizon), and how a refund can help get you closer to your financial goals.

7. Jump-start savings for a major purchase or life event

Whether you’re seeking to buy a house, renovate a home or take an extended vacation, the additional cash from a tax refund can help you reach that goal sooner. However, where you store your refund in the meantime will be key. If your time horizon is shorter, consider storing these assets in a vehicle that generates returns and is easily accessible, such as high-yield savings accounts, CDs or money market accounts. The longer the time horizon, the more options for potentially earning a return on the money you put aside. We will provide guidance on investing solutions to potentially growing your money.

Plan your tax refund strategy

We will help you determine how to strategically allocate your tax refund to meet your financial goals.

Questions to discuss with us

  • What is the best place to store my tax refund, considering my financial goals?
  • How can a lump sum of money, such as a tax refund, help jump-start my retirement savings?
  • Beyond a tax refund, what additional opportunities do I have to save for my goals?