7 Smart Ways to Invest Your Tax Refund

Some Americans are going to be eagerly awaiting their tax return refunds, thinking about what they might be able to do with that extra money. But now may be a good time to look into how to invest that money instead of immediately spending it. So before you cash in your refund check, here are a few things you might consider doing with it.

It may sound simple, but putting your refund into a savings account could pay dividends later on. The best savings accounts can have a higher yield to help you make money while your tax refund sits in the bank. And it may be easier to earmark your cash for a specific purpose if you put it in a savings account instead of a checking account where it can be easily spent.

So think about some goals you may have for yourself, including a dream vacation or a kitchen improvement, and keep that chunk of change in your savings until you have enough to enjoy it.

It may be a good idea to pay your future self with that tax refund. Add your tax refund to an IRA account and let the money continue to grow until you’re ready to retire. Money in your IRA can be invested in a number of financial products like stocks, mutual funds, or index funds.

You may specifically want to look at mutual funds that are geared toward the year you expect to retire. These types of funds, called target-date funds, tend to have more risk early on and then move into more conservative investments as you get closer to your retirement date.

Pro tip: You may be able to get a tax break for your contribution to your IRA account on the 2022 tax return that you file next year. And if you haven’t filed your taxes yet this year, you have until April 15, 2022, to contribute to your IRA and get a tax break on your 2021 taxes.

Now is a good time to get rid of your credit card debt with the high interest rate or pay down your student loans. You may also want to consider knocking down some of your mortgage or car payments.

In these cases, however, you might want to check and see if there’s a penalty for paying those debts off early. But overall, getting debt off your balance sheet may help your budgeting by freeing up some of your monthly income that was going to those debts and using it to prioritize other expenses or things you want.

Things such as emergency medical expenses, car troubles, or losing your job can crop up unexpectedly and are stressful to manage. An emergency fund can help you pay off those expenses in a more timely manner and relieve you of the worry associated with events like that.

However, you’ll want that emergency money in an investment that can easily be liquidated in case you need it, so consider putting your cash in something like a savings account that can quickly be accessed for surprise expenses.

Stocks could be a good investment if you’re willing to be more exposed financially than you would be with a savings account. In the long run, a stock could make you more money than the small interest rate on a high-yield savings account, but it might also lose some value as well.

Look into different market options to invest in or perhaps even hire a financial advisor to help you decide where to put your money. You may also want to consider something like an index fund, which tracks a basket of stocks in the market and can help you diversify your portfolio.

If you have kids who may go off to college someday, now may be a good time to start investing in a college fund to cover things like tuition and books. Look into a 529 plan, which is specifically designed for education funds. Plans are administered by states, and you can invest the money in different types of investments depending on your needs or level of risk.

When you’re ready to withdraw the money, any earnings are exempt from both state and federal taxes. There is one caveat though: All money has to be spent on education in order to get that tax savings. But qualifying education includes college costs as well as K-12 programs, supplies needed, and even apprenticeships.

A health savings account (HSA) is a great place to put your refund to use for medical expenses later on. Any contributions or withdrawals you make are tax free as long as you spend them on qualifying medical expenses. That money can then be used for doctor co-pays and hospital visits as well as prescription drugs, vision and dental care, and even home tests for COVID-19.

However, check with your insurance provider to see if you have a high-deductible insurance plan that could qualify you for an HSA account. Unlike an FSA plan for medical expenses, HSA money does not have to be used in a calendar year.

The IRS said that more than 29 million Americans received a tax refund by the end of February 2022. So consider the different ways to make money with your refund such as saving it in a high-yield savings account or learning how to invest it in stocks and bonds. Whatever you do, make your money work for you and enjoy your refund.