We all love a big tax refund, including the folks here at TMA. Remember to claim your 2019 refunds from the IRS if you still haven’t – the deadline is July 17th and if you don’t claim it, the IRS gets to keep the entire payout (over $1.5 billion unclaimed!)
It can be tempting to spend it all impulsively when you do get your refund, but Money Athletes show discipline amidst temptation (so that the real fun can happen later!). So how should you use your tax refund? Here are a few places we like to put extra unexpected cash:
Emergency Fund:
We recommend at least 3-6 months in cash or cash equivalents in case of a job loss or unexpected expense. This should be the first priority as it keeps you from accumulating high interest debt during tough times.
Roth IRA:
Individuals can contribute $6,500 to a Roth IRA in 2023 (with a catch up contribution of $1,000 more for those aged 50+). These are after tax dollars, but your investments grow tax free (if you don’t take any money out until age 59 ½). Remember, Roth IRAs grow with compound interest – if you put in $6,000 to start at age 25 and then $500 a month until you reach 65, you’d be a millionaire by only having contributed about a quarter of that out of your pocket!
HSA:
Contribute up to $3,850 towards a Health Care Savings Account which are triple tax advantaged. What does that mean?
Tax Deductible:
HSAs reduce the amount you pay on your income taxes as these contributions are taken out pre-tax. While it’s easiest to contribute on each paycheck, you can also pay a lump sum to your HSA which will have the same effect. If you pay 22% in federal income tax and max out your HSA, it’ll save you over $800 in tax this year!
Investment Gains Aren’t Taxed:
Invest your HSA dollars today! Don’t let it just sit in cash in that account; train your money to work for itself while you’re living – the TMA mantra. You won’t pay any capital gains with HSA investments.
Tax Free Withdraws:
Unlike a standard 401k or IRA, qualifying withdrawals are tax free. If you need $500 for a specialist visit to a doctor, you can just take out $500 for qualifying medical uses, full stop.
Yourself:
Saving money is only one part of the TMA wealth building equation. It’s equally as important to invest in yourself and your earning potential. Growing your skills through business school, a coding boot camp, or an apprenticeship may be just the launching pad you need to grow your self or business!
These are just a few ways to make your tax refunds work harder for you! Although they might not be as glamorous as a new game console or a fun vacation, think of these investments as tools to open up more possibilities for you down the road. Money Athletes are constantly looking for ways to flex their financial muscles, and these options will cement your ability to tackle any unforeseen hurdles (or maybe even splurge on something later after your money’s grown a bit through investing)!
