If you’re like most people, you’re tempted to treat a sizable tax refund as money to blow. You could head to the mall or book a spa weekend, but first, take a few deep breaths and consider these investment ideas for your unexpected windfall:
Apply It to Debt
If you’re refunded enough to pay off a credit card, by all means do so. You can then close the account, save the yearly fee and improve your credit score. You could also throw it toward a car loan, medical bills or student debt.
Start or Add To an Emergency Fund
Failing to save for the unexpected forces you to use credit cards and incur interest. At the very minimum, you should have two weeks’ pay or $1,000 saved for emergencies, and that will hardly do if you lose your job.
Use a large refund to start your fund or rebuild it. Open a money market account or a savings account that earns a little interest. Bear in mind that plumbing disasters and major car repairs are emergencies. Christmas and prom night are not.
Invest in the Stock Market
If you’ve always wanted to buy shares but were afraid of taking risks with your 401(k) or individual retirement account, consider investing in a no-load mutual fund.
In a typical mutual fund, added costs can range anywhere from 1 to 5 percent of the amount invested. Since no-load funds are directly distributed by investment companies rather than secondary parties, commissions and fees are eliminated.
Pad Your Insurance Coverage
Scrutinize your homeowner’s policy for gaps that could cost you a fortune if things go wrong. You may be surprised to find that sewer backups, termite infestation and even roof repairs aren’t covered under standard policies in many states. Just $50 or so could buy $20,000 of extra protection.
Will your insurance be sufficient if someone is injured in your home or in an accident involving your car? A personal umbrella policy will only cost you $200 to $300 for $1 million in additional coverage. If you’re ever obligated to pay medical or legal costs, you’ll be glad that you have it.
Repair, Replace or Improve
Large tax refunds are ideal for investing in your home or property.
Maybe you’ve put off buying a new washer and dryer. Maybe it’s time to upgrade to high-efficiency kitchen appliances. Is your lawn the neighborhood eyesore? Are dangling tree limbs unsafe?
Even a modest refund can go a long way. Paint a couple of rooms, upgrade bath fixtures or install programmable, energy-saving light switches. Thanks to numerous home improvement apps, do-it-yourself projects have never been easier.
Not only do home improvements pay long-term rewards, but they also come with tax benefits if you sell your home. You can deduct the costs for certain improvements if you relocate in the future, so keep good records.
Earmark Your Refund for Future Fun
Within limits, you can contribute to an IRA and withdraw the money tax-free in retirement. Think of how nice it would be to take a cruise or ski the Alps when you have the time to truly enjoy the trip. There are a number of stipulations, so ask your tax adviser.
Invest in Your Kids
The cost of college tuition is steadily climbing. If you have children, it’s never too early to start saving.
In 1996, 529 plans were introduced to help families sock away funds. Sometimes called qualified tuition programs, they are sponsored by states or state agencies and are exempt from federal taxes. They may be designed to prepay tuition locked at current prices or as college savings plans. The money can be used for tuition, textbooks, computers or other expenses at accredited colleges and universities. Vocational schools and even some foreign institutions are also eligible.
Another idea is to start Roth IRAs for your children. If they’ve earned any money at all, such as from babysitting or doing yard work, they’re allowed to contribute. If you can part with your refund to help them get started, it’s a great opportunity to teach the importance of saving for retirement.
Pay It Forward
Seize the opportunity to help your community or disadvantaged people.
When researching charities, it’s easy to feel overwhelmed. Websites like charitynavigator.org can help you narrow the field and ensure that your gifts make an impact. If you itemize deductions on your tax return, your donations will be tax-deductible.
Donor-advised funds for charitable giving are on the rise. Contributions are immediately tax-advantageous, but you can take your time deciding which institutions you’d like to grant money to. The funds are managed by sponsoring organizations that disburse them according to your wishes. The account balance can potentially grow while you’re doing your homework on IRS-qualified charities.
Be Good to Yourself
If you’ve worked hard and saved appropriately, there’s nothing wrong with rewarding yourself.
There’s no better time to take a well-deserved vacation than when you can pay cash for it, but be selective. Make sure that your destination is restful and rejuvenating. Avoid crowds and tourist traps. Instead, find well-kept secrets off the beaten path. Lesser-known destinations often provide better accommodations, food and service at much lower prices. There are a number of apps to help you plan your trip and save money.
If you’re eyeing a new TV or planning updates to your wardrobe, take your time. Avoid impulsive spending. Just because you can pay full price or spring for the top brands doesn’t mean that you should. Do diligent research before making a major purchase.
However you invest your tax refund, make sure that you get the most bang for your hard-earned bucks.