April 21, 2023
If you're waiting for your tax refund, you may be ready to start an online shopping spree or to make a big purchase, like an 85-inch TV. Take a moment to think about it. Times are tough and you deserve to treat yourself, but this may also be the time to boost your savings accounts. According to the IRS, 2023 average return is $2903, down from $3263 in 2022, but up from $2323 in 2021.
“There are so many ways you can spend a tax refund. A tax refund is like a savings account that the government has been holding onto for you. It’s essentially forced savings, but with no interest accumulation,” says Dawn-Marie Joseph, founder of Estate Planning & Preservation in Williamston, Michigan.
If you’re looking for way to boost your financial plan and put your refund to work, consider the following ideas:
- Pay down High Interest Credit Card Debt
- With interest rates rising throughout 2022 and into 2023, variable debts are now more costly than they have been the last few years. Average interest rate up to 20.40%, up from 16.45% in 2021
- Put in place or add to an Emergency Fund
- Certificates of Deposit (CDs) are offering some pretty good rates right now. You do lock up your funds for the length of time of the CD, but you get to take advantage of the higher interest rates.
- Money market mutual funds with current yields greater than 4%.
- Contribute to a Traditional or Roth IRA
- In an IRA, you can save for retirement outside of an employer-sponsored 401(k). In 2023, most people can contribute up to $6,500 across all IRA accounts. The exception is for people ages 50 and older, who can contribute an extra $1,000 for a maximum of $7,500 this year. With a traditional IRA, you can often get a tax deduction for your contribution (based on income limits and whether or not you also contribute to a 401k), and you pay income taxes on withdrawals in retirement.
- A Roth IRA is funded with after-tax dollars, meaning when you deposit money into a Roth IRA, the money goes in post-tax. This is different than a traditional IRA or 401(k) as money goes in pre-tax. However, once the funds are invested in a Roth IRA, it grows and compounds over time, and can be withdrawn tax-free when you reach 59 and a half years old. When you retire, you pay no taxes on withdrawals because you already paid income taxes on the money with which you made the deposits . Your Roth IRA can double as your emergency fund, since you can withdraw contributed sums at any time without taxes or penalties. Just don’t dip into earnings, or you may be penalized.
- Contribute to a College Fund
- If you are worried about over-funding, Secure Act 2.0 allows those with 529 plans open for at least 15 years to move up to $35,000 in unused funds to a Roth IRA.