10 Smart Uses for Your Tax Return
If you are expecting to receive a refund on your taxes this year, what are you planning to do with it? In the past, the average refund was around $3,000, but that number may change due to the new tax laws. If you get a refund, consider using it to bolster your personal balance sheet. Here are ten good things you could do with the money.
10 Smart Uses for Your Tax Refund
If your refund was substantial, consider giving yourself an immediate raise by adjusting your tax withholding to increase your take-home pay.
1. Pay Off Credit-Card Debt
Using your refund to pay off a balance with an 18% interest rate is like earning 18% on your investments -- an incredibly valuable use of the money.
2. Rebuild Your Emergency Fund
It's a good idea to keep three to six months' worth of expenses in an emergency fund, so you don't land in debt or have to raid retirement funds if you have unexpected expenses. If you've had to tap the fund over the past few years, you can use your refund to help build the account back up. Keep the money easily accessible in a money-market account or savings account that earns some interest.
3. Boost Retirement Savings
You can contribute up to $6,000 to a Roth IRA for 2018 (or $7,000 if 50 or older) -- and withdraw the money tax-free in retirement. You can contribute the full $6,000 as long as your income falls below $120,000 if you're single, and $189,000 if married filing a joint tax return. You can make a partial contribution if you earn less than $135,000 if single or $199,000 if married filing jointly. If you work and your spouse does not, you can also contribute to a Roth IRA in his or her name if your joint income is within those limits. Even if you've retired from your main job but are working part-time, you may be able to contribute to a Roth. If you earn too much for a Roth, you can contribute to a nondeductible traditional IRA, then convert it to a Roth.
4. Fund a Taxable Account
Use the extra cash to buy shares in a mutual fund or stock you've been considering -- but may feel is too risky for your IRA or not available in your 401(k) plan.
5. Gaps in Your Insurance
Liability Insurance. Cover your legal expenses if someone is hurt in your home or by your car. It generally costs just $200 to $400 to buy a personal umbrella policy that provides $1 million in coverage over the limits of your auto- and homeowners insurance policies.
Home insurance. For about $130, you can add $10,000 to $20,000 in sewage backup coverage -- which isn't part of a standard homeowners policy. Consider buying a home generator: A 6.5 kw portable generator costs about $800 to $1,000. An automatic standby generator costs more than your refund (about $4,000 plus $3,500 for installation), but the money you get from Uncle Sam can help you start saving for one. You also can pay to trim your trees to help protect against some of the most common types of storm damage and put together a disaster kit.
6. Build Your College Savings
It's always hard to juggle saving for college and retirement. Here's an opportunity to use your extra money to contribute to a 529 account. You'll be able to use the money tax-free for college bills, and you could get a state income-tax deduction for your contribution.
7. Help Your Kid Save
You can use the extra money to contribute to a Roth IRA for your child. Your kid is eligible as long as he or she has earned income -- from mowing yards or babysitting, for example. Your child can contribute up to $6,000 or the amount of his or her earned income for the year, whichever is lower, and you can give him the cash to do it.
8. Prepay Your Vacation
Set aside some money for vacation rather than using your credit card and paying interest long after you have returned. Or you can use some of your refund to start saving for holiday gift-giving or help with other short-term goals, such as for a down payment on a new car.
9. Invest in Your Home
Your refund won't be enough to redo your kitchen or bathroom, but it can pay for some smaller home improvements. Use the extra cash to add a backsplash, paint a room or cabinets, replace your bathroom sink, swap out your faucets, organize a closet, install a programmable thermostat or spruce up your yard.
10. Give to Others
If you have your financial bases covered, consider using your refund to make a charitable contribution to help others in need. You'll feel good -- and you'll be rewarded for your good deed when you file your tax return next year (charitable contributions are deductible if you itemize).
You also can use your refund to help accumulate enough money to open up a donor-advised fund. Most funds require a minimum of $5,000 to $10,000. You can claim a tax deduction in the year you make a contribution to the fund, but you have an almost unlimited amount of time to decide which charities to support.
10 Tips for Your $'s Future
However much you make or save now doesn’t promise you a bright financial future. Life is unpredictable.
Follow these 10 tips to prevent you and your family from money troubles.
1. See a lawyer and make a will.
If you have a will, make sure it is current and valid in your home state. You and your spouse should review each other’s will – ensuring that both of your wishes can be carried out. If you are divorced and remarried, update your beneficiary designations. Provide for guardianship of minor children, and establish education and maintenance trusts.
2. Pay off your credit cards.
Almost 40% of Americans carry credit card debt. This is not good for your financial future. Create a systematic plan to pay down your balances. Don’t fall into the “0% balance transfer game” - moving debt from a higher-interest credit card to a lower-interest one. It hurts your credit score, making it harder to get loans and insurance at a good rate. You can avoid an unpleasant increase in your insurance rates by managing your credit wisely.
3. Buy term life insurance equal to six to eight times your annual income.
Also consider purchasing disability insurance think of it as “paycheck insurance.” This is primarily true for younger folks who have financial obligations to cover with future income. Stay-at-home spouses need life insurance, too. Most people don’t need a permanent policy, such as whole life or universal life, but each family’s needs are different. You should review your situation carefully with an insurance professional (preferably two or more) before making decisions.
4. Build a 3-to-6-month emergency fund.
This keeps you from having to charge up your credit cards when life’s emergencies strike. In the interim, before you build up your fund, you can establish a home equity line of credit, which allows you to borrow money against your house – this can take the place of part of your emergency fund.
5. Don’t count on Social Security too much.
Since projections show that Social Security is only able to pay 77% of promised benefits after 2033, you should adjust what you expect to receive, especially if you are younger than 50. Make up for this by funding your individual retirement account every year. If you don’t fund these accounts annually, you lose the opportunity to increase your tax-deferred savings. Fund an after-tax Roth IRA over a traditional IRA if you qualify.
6. If offered, contribute to your 401(k), 403(b), or other employer-sponsored saving plan.
Just the same as with your IRA, these are opportunities you should take advantage of to defer funds. In addition, if you don’t participate, you lose the chance to receive any matching funds from your employer.
7. Use your company’s flexible spending plan to leverage tax advantages.
A flexible spending account allows you to pay for health-care dependent care expenses with tax-free dollars. You lose the tax advantages for that year if you don’t use your flex plan annually.
8. Buy a home if you can afford it and maintain it properly.
With every mortgage payment, the equity in your property grows. You’ll have much more to show for your money spent than a box full of rental receipts. The benefits are more than financial – studies show that home ownership adds to peace of mind and improves quality of life.
9. Use broad market stock index funds to reduce risk and minimize costs.
Indexes are a simple way to diversify. Most importantly, they’re cheap. If you have limited options, for example in your 401(k) plan, make sure that you diversify across a broad spectrum of investments by getting a low-cost index.
10. Don’t be over-weight in any one security, especially your employer’s stock.
As a rule of thumb, keep exposure to any single stock to less than 5% of your overall portfolio. If you overexpose to a single stock and that company goes bankrupt, you lose a significant portion of your portfolio. It can happen easily. History is littered with good companies that went bad.
Header Photo by 401kcalculator.org
Copyright © 2017 The Kiplinger Washington Editors. All rights reserved. Distributed by Financial Media Exchange.
Article written by Jim Blankenship, CFP, EA. Copyright © 2017 AdviceIQ. All rights reserved. AdviceIQ has an agreement to republish this author’s content. Distributed by Financial Media Exchange.