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Getting your tax refund opens up a plethora of opportunities. Will you save the money? Invest it? Pay down debt? All of these options can be beneficial for you depending on your financial situation and specific circumstances. However, options alone are pretty much worthless. Not only should you understand your options, but you should understand when those options make sense for you.
Put Money In Savings
Putting your tax refund into your savings account is a good idea when you have no debt, and you don’t have any other ideas for the refund – at least not immediately. It’s also a good place to put your tax refund if you do happen to have some ideas for that money in the near-term. Any kind of investment you would put that money into will only cost you money in transaction fees if you plan to spend it inside of 3 months. A savings account will actually earn you a bit of interest. When searching for savings accounts, try to find one that invests in a money market fund. While you won’t be investing in the money market yourself, the bank will pay interest on your savings equivalent to what you would get through an actual money market mutual fund.
Pay Down Debt
It makes sense to pay down debt with your tax refund when your total debt exceeds your total savings and that debt has a higher interest rate than the rate you’re earning on your savings. Classic examples of high-interest debt include credit cards and personal loans. While it might not sound as fun as a new computer or a nice vacation, paying down debt helps you out in the long run. By paying down or paying off debt, you can potentially free up the money that used to go towards payments on that debt. Then, that “found money” can be applied towards savings or anything else you want.
IRA
An Individual Retirement Account, or IRA, is a retirement account. These accounts allow you to save money for your future retirement on a tax deductible basis for traditional plans. A traditional IRA allows you to make the contribution with after tax dollars, and then deduct that contribution from your income on your tax return. When you receive a tax refund, set up your withdrawal options through a brokerage firm, your bank, or your insurance company. When you file your taxes, be sure to fill out lines 73b through 73d on form 1040. Make sure you really want to contribute to a traditional IRA because withdrawals are restricted once the money is in there. In general, you cannot make withdrawals until you’re age 59 1/2, although there are some instance when withdrawals are allowed (i.e. paying for non-reimbursed medical expenses, making a down payment on a first home, and paying for health insurance premiums when you’re unemployed). A Roth IRA does not allow any tax-deductible contributions. Instead, you contribute the tax refund to the Roth and receive all investment earnings tax-free when you retire. During your lifetime, you may withdraw any amount of the contribution without paying a tax or penalty.
No-Load Mutual Fund
No-load and low-load mutual funds are getting pretty popular and for a very good reason. These funds typically invest in a stock market index and are not traded actively, which means the transaction costs are kept pretty low. This is what makes these types of mutual funds so attractive to investors. The stocks or bonds in the fund mirror the returns of the index, so you have to be comfortable earning market returns. These types of funds can be purchased inside of your IRA or can be purchased in a separate investment account.
About the author: Post contributed by Hayley Russell, a freelance forex trading halal writer, on behalf of sunbird forex brokers and currency trading specialists. All views and opinions expressed belong to the writer and do not necessarily represent Sunbird FX.