Make Your Tax Refund Work for You
Millions of Americans will receive a tax refund when they file their taxes this year, giving them a nice cash boost that can help improve their financial lives. The average tax refund typically runs into the low thousands, according to the IRS, so the money taxpayers receive can be substantial. It’s easy to feel like your tax refund is free money, but while you may have forgotten about it, it’s something that you’ve earned. So why not use it to achieve your goals?
The average tax refund was $3,182 as of March 1, 2024, according to the IRS, up from $3,028 at the same time in 2023. Though the idea of spending it may be tempting, the best use of your refund is to boost your financial situation and increase your net worth by saving, investing, or reducing high-interest debt. Makes sense right? Then why do only 5% of Americans, who receive a tax refund in 2024, say they plan to invest a portion of their tax refund?
Why give all that money back to the system when you can set aside a portion of it to benefit your personal growth and goals? Taking as little as $500 is enough to invest in your future. Below you'll find advice on some of the smartest ways to invest your tax refund. And once you are done reading consider contacting a USPS FCU Personal Service Representative who can guide you through the personalized ways your Credit Union can help.
3 Smart Ways to Make Your Tax Refund Work for You
1. Contribute to an IRA -
If you’ve already filed your return, it’s too late to contribute to an individual retirement account for the 2023 tax year, unless you want to file an amended return. But you can take your refund and put it into a traditional IRA for the current tax year, what’s in the account can compound tax-free until you withdraw it, and the contribution may reduce your 2023 taxable income. (If you haven’t yet filed a return, the deadline for contributing to an IRA for the 2023 tax year is April 15, 2024.) Learn more about Individual Retirement Accounts at USPS FCU.
2. Boost Your Emergency Fund -
There’s some debate about which should be done first — paying off high-interest debt or having an emergency fund. In any case, starting an emergency fund should be a top priority — and then the rest can be applied toward debt or other priorities. A $3,000 refund put into an account that yields a 4.0 percent annual percentage yield (APY) would see about $120 in growth after a year. If you already have an emergency fund and you’ve either applied money toward debt or don’t have any debt, then consider putting at least some of your tax refund into a high-yield savings account. It could be money earmarked for a down payment on a home, a wedding, or saving for a vacation.
3. Pay off debt -
Using your tax refund to pay off high-interest debt could be the best use of the money. Consider this example: You owe $6,360, your credit card APR is 21%, and you pay $150 a month toward that balance. At this rate, it will take 78 months to pay off and cost an additional $5,199 in interest. That's an awful waste of money so always consider paying down high-interest debt when possible. However, there are ways to get creative, so contact USPS FCU for assistance and advice. We can help you with personalized solutions like transferring credit card debt to a lower interest rate then you can invest the money you would have used to pay off the debt. Currently, USPS FCU offers new VISA Credit Card holders 0% APR for six months on all balance transfers. Contact us today to learn more.
You have to ask yourself what will make you feel better in the long run. If, in the future, you’d like a smaller refund, talk to your employer about increasing your withholding allowances so less income tax will be withheld. Your annual tax refund will be smaller, but your monthly paycheck will be larger, and you’ll be able to spend that money on your daily expenses. Or you can think of your tax refund like it’s forced savings and use it as a reliable tool to continue or start building your wealth and financial legacy.