Key Takeaways:
A tax refund can be a useful financial reset—especially if you use it to build or finish a three-to-six-month emergency fund.
Paying down high-interest debt and student loans can deliver an immediate, guaranteed “return” by lowering your long-term costs and stress.
Putting part of your refund into retirement or education savings can turn a short-term windfall into long-term progress, while still leaving room for a small, guilt-free reward.
Are you getting a tax refund this year? Plenty of folks are. Much like trivia, running through the IRS statistics is always interesting... at least for those who like diving into the minutiae. So here are some tax facts for the 2024 season:
- The standard deduction for 2024 increased to $14,600 for individuals and $29,200 for married couples filing jointly.
- The alternative minimum tax (AMT) exemption rose to $85,700 for individuals and $133,300 for joint filers.
- The federal estate and gift tax exemption increased to $13.61 million per person.
While we would counsel against an interest-free loan to the federal government, some folks like what might be called "forced savings."
Before we dive in, we want to quickly add: If your children, a relative, or close friend has talked about their refund, feel free to forward our suggestions to them.
7 Smart Ways to Invest Your Tax Refund
Create a rainy-day fund
Is it fully funded? You understand the importance of reserves. Whether it's a home repair, auto repair, a layoff, or an unexpected bill, having cash set aside will ease the financial burden. We recommend three to six months of readily accessible savings in the event of an emergency. If you don't have a rainy-day fund, don't procrastinate; get started today.
Get out of debt
Years ago, I saw a quote that went something like this: "The road to poverty is paved by high interest rates." I don't know who coined the phrase, but many people run up high-rate debts and struggle to pay them off. Pay down or pay off high-rate credit cards or unsecured loans. You might start with the card with the lowest balance first. Wiping the slate clean on a card or cards is a big psychological win and will encourage you to stay in the battle until you are out of debt.
Tackle your student loans
Can the president wave his hand and forgive your student loans? If he could (and maybe he can; the jury's still out on this one), would you receive a 1099 for debt that's forgiven (the devil is always in the details)?
Or, for that matter, should you wait for the bureaucracy to solve your problem? If you have an emergency fund and your credit card debt is low, consider tackling your student loan debt. Sure, they helped you get through college, but they are a burden hanging over your financial future.
Invest in a retirement fund
If you don't sow into a retirement plan, there will be no harvest come retirement. For example, if you take the hypothetical $3,263 tax refund and stash it in a Roth IRA, you'll have $32,834 in 30 years, assuming an 8% annual return. Plus, you'll pay no federal income tax when you take a qualified withdrawal from a Roth IRA. At 10%, you'll have $56,937, and at 6%, you'll have $18,741. Of course, returns are not guaranteed and may vary, but trading one's natural inclination for instant gratification for a future payoff can pay you a handsome reward.
Invest in the future of your child, grandchild, or yourself
There are various options, and we can point you in the right direction to help get you started. You might consider an education savings account, or a 529 plan, for your children. While you won't get a federal tax deduction for contributions into the accounts, these vehicles allow you to grow the nest egg tax-free, and they can be withdrawn for qualified expenses without a tax liability.
Have you decided that you would like to invest in yourself? Do you want to ascend to the next level? Certifications and college classes can help sharpen your skills. Even if you are not career-oriented, investing in your hobbies can bring added enjoyment.
Gift your refund
You may decide that you don't need the money. I know folks who gave away their stimulus checks to their children or to charity. What puts a smile on your face? That may be the appropriate strategy for your refund.
Have some fun
As we said, the average refund check so far has been $3,263. You might take one of our ideas to heart and earmark the lion's share toward that goal. But save some for yourself. Whether it's a nearby weekend trip, a day trip to the spa, or that expensive restaurant you have always wanted to try, it's okay to take care of yourself.
These suggestions are just food for thought. Be strategic. Think long-term. And take some time to consider what you might do with your refund or any windfall you may receive. A lack of planning and impulsive decisions can be costly. And remember, we are always here to assist you.
I trust you've found this review to be educational and helpful. If you have any questions or would like to discuss our wealth management services, please feel free to contact us.
As always, I am honored and humbled that you have allowed me to serve as your financial advisor.
John Gigliello, CFP®
John Gigliello, CFP®, is a fee-based fiduciary financial planner in Albany, NY, serving individuals age 50+ with comprehensive planning and investment management, centered around proactive and advanced tax planning. John earned a Certificate in Financial Planning from Boston University and, more recently, successfully completed the rigorous CFP® Certification examination to become a CERTIFIED FINANCIAL PLANNER™. John earned the Accredited Investment Fiduciary® Designation from the Center for Fiduciary Studies®, the standards-setting body for Fi360. The AIF® designation signifies specialized knowledge of fiduciary responsibility and the ability to implement policies and procedures that meet a defined standard of care. John currently serves on the Albany County Investment Advisory Board, having been appointed by a unanimous vote of the County Legislature in January 2019. In this position, John advises the county on a strategy for making the best use of money available for investment.