This time of year, many households in the US see the largest one-time influx of cash they get all year – Their tax refund.
While many rush to spend the refund on a down-payment for a new car, new clothes, or home upgrades – Longer term investors may be rewarded for saving that money instead. Here’s a look at a couple of options for saving this years’ tax refund.
Today’s question is:
“What is the best way to save my tax refund?”
Although getting a tax refund means that you were likely overpaying the government all year, it is still a nice surprise. And if you weren’t expecting to need the money, you should put it to good use.
If you are looking to build up your savings, nothing helps jump start your savings at the start of the year like a large tax refund.
This year, the average tax refund is just over $2,600. If you saved $2,600 per year in an investment that grew at 7% per year for the next 20 years, you would see your savings grow to more than $106,000! So if you have been struggling to put money away for longer term goals, even just saving your tax refund each year can help get you on track.
The first priority we give clients is usually building up a cash reserve, or emergency fund. If you don’t have at least a few months of expenses saved up in a savings account, this should be your top priority. Now-a-days online banks such as ALLY, and local credit unions seem to offer the best yields in savings accounts.
Additionally, higher income individuals may find better tax adjusted returns in short term treasury bills, since they are exempt from state taxes.
If you are saving for retirement, an IRA or Roth IRA is likely the best account for your tax refund. For most, as long as you are under the income limit to be eligible, we recommend a Roth IRA to help offer tax diversification and to build a source for tax free income in retirement.
There is another option as well that may be beneficial for some. Tax returns can also be used to buy paper series I savings bonds. In fact, using your tax return to buy paper savings bonds is the only way to buy paper savings bonds anymore!
I series savings bonds have a fairly low return, but are very safe and have an interest rate that can rise over time to keep pace with inflation. They also grow tax free if used for qualified education expenses, such as a child’s future college tuition. So if you are saving for future college expenses, or looking to get your hands on some paper savings bonds, this could be another great option.
Need help getting started? Get in touch!