This Might Be the Best Thing to Do With Your Tax Refund

Taxes are the kind of task we all have to grin, endure, and get through. But for some people, there’s a silver lining when they have to go through the grueling process of gathering paperwork galore: getting a refund.

In reality, a big tax refund isn’t something you should really hope for. That’s because all it really represents is money that you were supposed to collect in the previous year but didn’t.

Still, most people would rather get a refund when filing their taxes than having to write a check to the IRS. And while tax refunds are smaller so far this filing season than last, the average refund taxpayers received in early March was $3,028.

A person at a laptop.

Image source: Getty Images.

Now there’s about a month to go before taxes for 2022 are due, so the average refund figure could change. And besides, that average refund number is just that—an average. You may be lining up for a smaller or a much larger payday from the IRS.

But no matter what your personal tax return looks like this year, if you’re not struggling with a shortage of emergency savings or costly debt, it’s worth investing that money for your future. And that could result in a nice tax break as well.

Use your refund for retirement

Many people rely on their tax refunds to pay off their credit cards or even cover important bills. If that’s the boat you’re in, you may not have the option to put your tax refund dollars into an IRA or 401(k) plan.

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But if you’re managing your spending well and don’t have costly debt, it’s definitely worth using your tax refund to top up your nest egg, or start building one if you haven’t had that opportunity already.

First, if you deposit your tax refund into a traditional IRA or 401(k), you’ll exempt a portion of that year’s income from taxes, resulting in a lower tax bill. And even if you choose to fund a Roth 401(k) or IRA, you’ll still enjoy benefits like tax-deferred gains and tax-free plan withdrawals in retirement.

Most importantly, set yourself up for longer-term financial stability. This is especially true if you are fairly young and your money has had plenty of time to grow.

Let’s say you get a $3,000 tax refund this year and you’re about to retire in 35 years. If you invest that money at an 8% compound annual return, which is slightly below the stock market average, it will eventually grow to over $44,000. That could potentially be enough to pay your retirement expenses for a full year.

In fact, it’s a good idea to use your tax refund to top up your retirement savings every year – especially if you’re not used to contributing money on a regular basis. While a tax refund is certainly not free money, it is money that could do a lot for you if stowed away in an IRA, 401(k), or other long-term savings or investment account.

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