Smart Uses for Your Tax Refund
Smart Uses for Your Tax Refund.
If you have a refund check coming your way, consider using it to bolster your personal balance sheet. The average direct deposit tax refund this year is $3,330. That's a nice chunk of change. Here are good things you could do with the money.
1.Pay Off Your Credit-Card Debt
Credit card debt in the U.S. has reached staggering levels, with balances now totaling $1.21 trillion. In the fourth quarter alone, credit card balances grew by $45 billion, marking a 4% increase from the previous year, according to the Federal Reserve Bank of New York. With interest rates remaining high, carrying a balance on your credit card can be an expensive burden.
The average credit card interest rate currently stands at 20.09%, slightly lower than the record 20.79% set in August 2024, according to Bankrate. Even at this reduced rate, the cost of carrying a balance adds up quickly.
For example, a $5,000 balance at 20.09% interest would accrue over $1,000 in interest over a year if only minimum payments are made.
By using your tax refund to pay off your credit card debt, you’ll not only save money on interest but also improve your financial health by lowering your credit utilization ratio. Reducing your balance can also free up more of your income for savings, investments, or essential expenses.
If you can’t pay off your entire balance, consider putting as much of your refund as possible toward it and developing a plan to tackle the remaining debt. Strategies like the debt snowball (paying off the smallest balance first) or the debt avalanche (prioritizing the highest-interest debt) can help you get out of debt faster and save money in the long run.
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.
Even adding a small portion of your refund can help strengthen your financial safety net, making it easier to handle life’s surprises.
Beyond just the numbers, having a well-funded emergency account provides peace of mind. Knowing you have a financial buffer in place allows you to make decisions from a position of strength rather than desperation.
3.Boost Your Retirement Savings
You can contribute up to $7,000 to a Roth IRA, or $8,000 if you’re 50 or older, and withdraw the money tax-free in retirement, provided you meet the age and holding period requirements.
You can contribute the full amount as long as your Modified Adjusted Gross Income (MAGI) is below $146,000 if you’re single or $230,000 if you’re married and filing jointly.
If your income falls between $146,000 and $161,000 as a single filer or $230,000 and $240,000 as a joint filer, you can make a partial contribution. However, if your income exceeds $161,000 as a single filer or $240,000 as a joint filer, you are not eligible to contribute directly to a Roth IRA.
If you work and your spouse does not, you can contribute to a spousal Roth IRA in their name, as long as your joint income falls within the Roth IRA income limits.
Since Roth IRAs grow tax-free, contributing can be a powerful way to build long-term retirement savings while ensuring that your future withdrawals won’t be taxed, giving you more financial flexibility in retirement.
4.Fill Gaps in Your Insurance
Liability insurance is designed to protect you financially if you're found responsible for causing injury or property damage to others. For example, in auto insurance, liability coverage pays for the other party's medical expenses and property repairs when you're at fault in an accident. Similarly, homeowners insurance typically includes liability coverage to protect you if someone is injured on your property.
However, standard auto and homeowners policies may have liability limits that are insufficient to cover significant claims. To bridge this gap, you can purchase a personal umbrella policy, which provides additional liability coverage beyond the limits of your existing policies.
Umbrella policies are relatively affordable. Obtaining $1 million in coverage typically costs between $200 and $400 annually. This extra layer of protection can be critical in safeguarding your assets and covering legal expenses if you're held liable for substantial damages or injuries.
5.Prepay Your Vacation and Save for Short-Term Goals
Instead of charging your vacation to a credit card and paying interest long after your trip ends, consider using your tax refund to prepay for your getaway. Not only does this help you avoid debt, but it also allows you to take advantage of travel deals and book stress-free, knowing your trip is already covered.
If you have a travel rewards credit card, check your balance — your accumulated points or miles might cover flights, hotel stays or even an entire vacation package. Pairing your refund with rewards can significantly reduce costs, making it easier to splurge on experiences rather than expenses and maximize your travel rewards.
For those who love adventure on the road, consider renting an RV for a scenic road trip, where you can explore national parks, beaches or hidden gems without the high cost of airfare and hotels. If you prefer a more all-inclusive experience, use your refund to book a cruise, which bundles lodging, food and entertainment into one price — making it easier to budget upfront and relax once you're on board.
Even if you’re not traveling right away, setting aside your tax refund in a savings account for a future trip ensures you’re financially prepared when the time comes, whether it’s for holiday travel, a dream getaway or a spontaneous weekend escape.
6.Invest in Your Home
While your tax refund may not cover extensive renovations like a full kitchen or bathroom remodel, it can fund impactful home improvements. Consider projects such as adding a backsplash, painting rooms or cabinets, replacing bathroom fixtures, upgrading faucets, organizing closets, installing a programmable thermostat or enhancing your yard. These upgrades not only refresh your living space but also align with features that today's buyers desire, potentially increasing your home's value.
Additionally, investing in home hardening — strengthening your home against natural disasters — can be a wise use of funds. Simple measures like installing storm shutters, reinforcing garage doors or securing heavy furniture can significantly enhance your home's resilience to events such as hurricanes, earthquakes or wildfires. These proactive steps not only protect your property but may also lead to savings on insurance premiums.
7.Save for Your Health
Contribute to a health savings account. For 2024, the HSA contribution limits are $4,150 for individuals and $8,300 for families. Additionally, if you're 55 or older, you can make a catch-up contribution of $1,000.
An HSA offers a triple tax benefit: contributions are tax-deductible, earnings grow tax-free, and withdrawals for qualified medical expenses are also tax-free. These funds can be used to pay for deductibles, co-payments, prescription drugs and other medical expenses not covered by insurance.
Furthermore, after age 65, you can use HSA funds to pay Medicare Part B, Part D, and Medicare Advantage premiums. However, once you enroll in Medicare, you can no longer make new contributions to your HSA.
To be eligible for an HSA in 2024, your HDHP must have a minimum deductible of $1,600 for individual coverage or $3,200 for family coverage. The maximum out-of-pocket expenses for these plans are $8,050 for individuals and $16,100 for families.
By contributing to an HSA, you can effectively manage current medical costs and save for future healthcare expenses, all while benefiting from substantial tax advantages.
For more information, see 10 Things You Need to Know About Health Savings Accounts.
8.Establish an Estate Plan
If you don’t have estate-planning documents, you can use your tax refund money to make your wishes known for the future. You can meet with a lawyer to draw up three key documents: a will that divvies up your assets and appoints a guardian for your children; a health-care proxy, which designates someone to make medical decisions on your behalf if you’re unable to; and living will, which outlines your wishes for end-of-life medical care.
In addition to drafting these documents, it's important to organize and securely store them. Using digital storage solutions can enhance accessibility and security. For instance, Quicken's LifeHub offers a platform to securely store and manage your financial documents, ensuring they are protected from physical damage and easily accessible when needed.
By proactively establishing and organizing your estate plan, you provide clarity and peace of mind for yourself and your loved ones, ensuring that your affairs are managed according to your wishes.
All the best, Charles
Charles C. Scott AIF®, CDP®
ACCREDITED INVESTMENT FIDUCIARY®CERTIFIED DEMENTIA PRACTITIONER®
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