Before you blow your tax return on something like a shopping spree or new X-Box, you should consider spending it on something more worthwhile. Using the extra money from your tax return wisely now can pay off later. Find out the best ways to spend your tax return here.
1. Pay Down Debt
One of the best ways to use your tax return is to pay down debts, especially debts with accruing interest. Paying down debts, like credit cards and student loans, can help lower the monthly burden on your finances. You may even save you money in the long run since the faster debts are paid, the less interest accrues.
2. Start an IRA
It’s never too early to start preparing for retirement. Using your tax return to open an Individual Retirement Account is a smart way to help prepare for your future. Since the traditional IRA is tax deductible, it could even help you next tax season. Once you reach age 59 ½, you can begin withdrawing from your IRA. At this time, taxes will need to be paid on the funds withdrawn from your IRA.
3. Invest in a 401(k)
Another smart use of your tax return is to invest in a 401(k) plan. If you have a 401(k) plan through your employer, consider increasing your contribution by talking to your human resources department. Besides the benefit of increasing your retirement savings, putting your tax return into your 401(k) can help reduce your taxable income, which can make next year’s tax return even better.
4. Invest in a College Fund
If you have children or grandchildren or are considering going to college yourself, college funds, specifically 529 plans, can be a great use of tax return money. 529 plans differ between each state, but generally speaking, they are a means to save money for college and can be used to pay tuition, books and housing. 529 plans come with certain tax advantages and each state offers its own incentives, so talk to your tax professional.
5. Enroll in Life Insurance
The idea of life insurance may seem rather morbid, since it only pays out if you die, but it can be beneficial if you have a family in the unfortunate event of an unexpected passing. There are different types of life insurance. Some life insurance plans provide financial coverage for a set amount of time, called term life insurance, whereas others, like universal life insurance, provide coverage for a lifetime. The type you choose will depend on the needs of you and your family. Regardless of the type of life insurance you choose, benefits paid at death are typically tax-free.
6. Boost Your Savings Account
It’s important to have a financial buffer in case of unemployment, household emergency, or medical accident. Simply putting your tax return into your savings account can help you be prepared for the unexpected financial emergency.
Though it may sound fun to spend your income tax return frivolously, the rewards will be short lived. Choosing to use the extra money from your tax return smartly can pay off for years to come.
– By Samantha B. Rivers, Editor