We’re well into tax season now, which means tax refunds are starting to roll out. If you’ll be getting a sizable refund, how should you use the money?
If your cash flow is healthy, consider these possibilities:
- Boost your emergency fund. You might want to use some or all of your refund to build or supplement an emergency fund. Generally, it’s a good idea to keep three to six months’ worth of living expenses in this fund, which can pay for things such as extensive housing or auto repairs or large medical bills.
- Pay down debt. You may want to tackle outstanding debt, especially if you're carrying high- interest debt like with most credit cards. One strategy is to pay down the highest interest debt first, but it can also be rewarding to pay off low balances entirely (and have one less payment every month).
- Help fund your retirement. You’ve got until April 18 to contribute to your individual retirement account (IRA) for the 2021 tax year. If you’ve already “maxed out” on your IRA for 2021, you can use your tax refund to begin funding your IRA for 2022. You can put up to $6,000 per year into an IRA ($7,000 if you’re 50 or over).
- Supercharge savings for your other goals. Whether you're saving for a house, wedding, vacation or other expense, your refund can help make faster progress toward realizing your goal. Or, if you have children or grandchildren and you’d like to help them with their future education, you might consider contributing to a 529 education savings plan.
- Donate to a charitable group. You could use your refund to make a charitable gift. Your generosity will be greatly appreciated by those charitable groups you support. And if you itemize on your tax return, part of your gift may be deductible.
While all these moves may prove helpful, keep in mind that getting a big tax refund may not always be in your best interest. After all, if you’re consistently getting large refunds, you’re essentially making interest-free loans to the government over the course of the year. You might want to adjust your tax withholding or estimated payments so you end up close to even, or perhaps only owing a small amount, when you file your return.
However, if you like the feeling of getting a “windfall” in the form of a tax refund, you have good options for what to do with the money – so make the choices best for your needs.