Receiving tax refunds is customary for many homes. Refundable and nonrefundable tax credits, overwithholding, and deductions can all lower a household’s overall tax burden. In some cases, households intentionally give the surplus money to the IRS to reap the benefits of an annual windfall. In other cases, it is incidental because the household did not intend for it to be that way.
For the 2021 tax year, the IRS gave over 96 million tax refunds, regardless of the reason for the overpayment. The value of the refunds reached nearly $292 billion, with an average refund of $3,039.
Refunds often present opportunities, particularly if your retirement planning is lagging behind schedule. Here are a few strategies to help you finance your retirement with the refunds you receive from your tax return filing.
Increase your retirement fund
Taking the money from your tax refund and using it to increase your retirement savings can be the first step towards setting it aside for retirement. Establishing an IRA could be a good idea because most 401(k) plans don’t allow lump-sum contributions from an employer.
The best time to take advantage of the tax benefits is one of the primary elements that determines whether you should aim for a regular or Roth IRA. A regular IRA can be a better option if your current tax rate is higher than what you anticipate it to be in retirement. If your anticipated retirement income is less than your current taxable income, a Roth may be the best option.
Open a brokerage account
You can only contribute a certain amount to retirement funds each year. The maximum contribution to an IRA in 2022 is $6,000, with an additional $1,000 if you are 50 years of age or older. The maximum for optional contributions to 401(k)s is $20,500, with an additional $6,500 if you are 50 years of age or older.
Opening a brokerage account could be a smart move if you want to use tax returns to ensure your financial future, even if you are completely financing your retirement account. 401(k)s and IRAs offer similar investments like individual stocks, exchange-traded funds (ETFs), and other traditional options, but they do not have the same restrictions.
Brokerage accounts don’t come with tax benefits, but they might make your money grow. Furthermore, you can access the account at any time before reaching 59 ½, which makes it a beneficial option if you intend to use investments to fund an early retirement.
Develop an investment plan before taking this course of action. The approach should include both basic risk management and diversification. If you don’t have the time to independently investigate your possibilities, you might want to consult a financial expert. This allows you to consult with an investment specialist and select alternatives that suit your needs and tastes.
Think about purchasing cryptocurrency
Buying some cryptocurrencies with your tax refund can be an alternative for people who don’t mind volatility. While it offers a route toward diversity, it is far riskier than conventional investing.
Physical assets typically do not support cryptocurrencies. Therefore, investor mood and public opinion mostly determine their valuations. That may cause significant price fluctuations, often in brief amounts of time.
It’s unclear if cryptocurrency can function as a universal currency. Furthermore, new regulations that alter the environment may be on the horizon. If you’re looking for unconventional ways to protect your financial future, it may be worth considering. Just be cautious and keep your own risk tolerance in mind.
Increase HSA savings
Contributing your tax refund to a health savings account (HSA) if you qualify for one may help you in retirement. An HSA’s remaining balance may carry over from year to year. Additionally, your contributions are tax deductible, and if you use the funds for approved medical expenses, you can withdraw them without incurring any taxes.
An HSA can also follow you if you change jobs, unlike many other options. Since you aren’t required to take distributions at any specific age, you can essentially keep the money for as long as you like.
By increasing your HSA, you make future health-related expenses easier to bear. This can be a wise choice in order to protect your financial future because healthcare costs typically rise with age.
Is it advisable to specifically create a tax refund?
Most people typically view a tax refund favorably. It’s not always the best option, though, to safeguard your financial future.
Even though a tax refund may seem generous, the IRS usually isn’t handing you more money. A refund primarily consists of the return of your money, except for funds associated with refundable tax credits. The IRS is only returning the difference between the amount you sent over during the year and the amount you owed in taxes; it’s money you already sent to them.
Since many households are effectively receiving their own money back, the surplus funds function as an interest-free loan to the federal government. Instead of growing like an interest-bearing account, that money just accumulates.
Changing your withholdings is preferable to letting the federal government keep your money interest-free. Reducing your withholdings slightly increases your paycheck. You can then take the excess and deposit it into an investing account, retirement account, or high-yield savings account. In this manner, you give the money an opportunity to develop while building a tiny nest egg, which will give you a little bit more than you otherwise would.
