9 Smart Ways to Spend Your Tax Refund

Smart Ways to Spend Your Tax RefundThe April tax deadline will be here before you know it.

I should be getting around to filing our tax return in the next few weeks.

This year, thanks to our little tax deductions (our kids) and my estimated tax payments, we just might be getting a decent sized refund.

If you work for someone else, you should adjust your W-4 to get the proper refund.

I’m normally a fan of managing the with-holdings such that you don’t get too much refund.

But I admit it’s nice to get a little money back.

I’m not sure where you find yourself today, but check out these two posts if you’re having trouble paying or filing your taxes:

In the past, we’ve used our tax refund money to help fund our Roth IRA contributions. I guess technically we used money from our bank account to fund the Roth IRA. But those funds will be quickly replaced by the tax refund.

Did you know that if you don’t already contribute to a 401K and meet the income requirements you can increase your tax refund by contributing to a traditional IRA?

What to Do With Your Tax Refund

You see (above) what I’m doing with my tax refund, along with my standard recommendation. But let’s look at some other things you can do with your tax refund. Here are 9 smart ideas.

Start an Emergency Savings Fund

Everyone needs an emergency fund to help them through a tough financial situation, like a job loss, car accident, or medical emergency. You need an emergency fund to create that cash cushion between you and your need for credit to solve the problem.

The standard advice is to shoot for about six months of living expenses. I think that’s fair, especially if you have two incomes in the home and your jobs are fairly stable. Know your risk though and make sure your emergency fund is big enough based on you.

If you’re looking for a place to open up an emergency fund, look no further than an online savings account.

Get Rid of Debt

Debt stinks. It causes stress and wastes money due to the high interest payments. Get rid of it. Make a solid plan to get out of debt (i.e. debt snowball) and get it paid off as quick as possible. A big tax refund could really wipe out a bunch of debt.

If you’ve just got mortgage debt, consider making a principal-only payment.

Save Money for Other Short-Term Goals

An emergency fund is a good starting point, but surely you have other short-term savings needs. Can you think of any reasons you’ll need a large chunk of cash in the near future? Here are a few ideas to get you started:

  • new or used car
  • major car repairs
  • trip or vacation
  • boat or motorcycle
  • downpayment on a home
  • furniture
  • improvements to your home
  • new clothes

Don’t go into debt to afford life’s upcoming necessities and pleasures. Use your tax refund.

Saving for Retirement

My favorite (best) thing to do with your tax refund is to do what I did, use it towards retirement savings. If you have a 401K through your employer, you could stash the funds there.

Many people use their tax refund to open an IRA. You guys know I love these. You can open them on your own with an online stock broker and you can control just about everything that happens with the money there, unlike your 401K.

Of course, there are the tax benefits that come along with saving for retirement with your tax refund. You could actually increase your return if you contribute to a traditional IRA, or SEP IRA (or even a Solo 401K) if you’re self-employed.

Save for College Expenses

Some people choose to use their tax refund to open up a 529 college savings plan for their child(ren). Money that goes into your 529 plan can grow tax-free as long as it’s used for qualifying expenses.

As long as you choose a “savings” plan vs a “prepaid” plan, your child(ren) can use the funds at any college or university that they want.

Go Back to School

Use your tax refund to go back to finish or start a degree. I love seeing people invest in themselves. Do it for fun, or see it as a way to increase your earning potential at your current (or future) employer.

Pay Next Year’s Taxes

If you own a business or have income where the tax isn’t withheld, it’s likely a smart idea to take some of your refund and use it to make estimated tax payments or at least save it for future tax payments.

Start a Business

Now you have the cash to start that business you’ve always wanted. You can tell someone is really passionate about their business idea when they self-fund the thing like this. Using your own money to start a business is definitely a better idea that taking out some business loan or borrowing from your relatives.

Use it for Charity

If the tax refund is a surprise to you, then why not use it to help a worthy cause. There’s definitely some organization that could use the funds more than you. If you do decide to give, use a qualifying charitable organization and get a deduction next year on your taxes.

If you haven’t filed your taxes yet, you can do so with any of these reputable tax software companies:

There are lots of things you could do with you refund: save, spend, give.

What do you plan to do with your refund? If you already spent the money, what did you spend it on?



Last Edited: February 12, 2016 @ 8:42 pm The content of ptmoney.com is for general information purposes only and does not constitute professional advice. Visitors to ptmoney.com should not act upon the content or information without first seeking appropriate professional advice. In accordance with the latest FTC guidelines, we declare that we have a financial relationship with every company mentioned on this site.
About Philip Taylor

Philip Taylor, aka "PT", is a CPA, financial writer, FinCon CEO, and husband and father of three. He created PT Money back in 2007 to share his thoughts on money and to meet others passionate about managing their finances. All the content on this blog is original, and created or edited by PT. Read more about Philip Taylor, and be sure to connect with him on Twitter, Facebook, or view the Philip Taylor+ Google profile.

Comments

  1. I am self employed so I pay quarterly taxes. Amazingly, we got a refund this year so I am using it to pay my next quarterly taxes. Which boosts our emergency savings. woo hoo

  2. We’re using 1/3 of it to replace the money we paid our accountant to do our taxes, 1/3 straight into savings, and the other 1/3 to get a few things for around the house.

  3. We didn’t get a refund this year. Because my blog income was higher than I expected I ended up having to pay about 4000 dollars in taxes at the end of the year, and then another 2100 or so in estimated taxes for 1st quarter 2010. It’s nice that i’m making extra income, but not so fun cutting those big checks!

  4. I’m using my federal refund to pay what I owe in state taxes. I’ll have about $12 left over. So ah… I guess I’ll buy something spiffy. 🙂

    I try to keep my refund really low.

  5. Just starting out on my own I chose to add it to my emergency fund. It wasn’t much of a refund but it definitely helped me ego knowing my E-Fund was just that much bigger. =)

  6. I used it to pay my rent

  7. We’re getting around 2K back, 1K is going right into savings, I’m making an extra payment on my snowball cc, about $300 is going into a fund for kids summer camp, and my wife is going to get new glasses. Anything left over is going toward an overdue car repair.

  8. We are setting ours aside for vacation. My goal, however, is to be like Peter and make so much money blogging that I have to send the IRS a big fat check. 🙂

  9. Well, I have overpaid Quarterlies and UI and I roll them over to the next period. Good news, I haven’t had to pay quarterlies this year yet. Bad news, I still have to pay personal taxes.

  10. MyFinancialObjectives says:

    What tax refund 🙁

    Maybe next year! 🙂

  11. I’m using 1/3 for vacation, 1/3 for savings, and 1/3 for some things we’ve been saving up for. I like getting a refund so i plan on it in advance.

  12. Hoping to invest in some nice powder skis!

  13. Lanise Taylor Weidle says:

    What refund??? Senior Citizens get nothing….our wonderful government has already spent what we paid in for the last 50 years…

  14. What’s a tax refund? Lol. I rarely see a tax refund but this year I should be getting one. Mostly because I had extra withheld from my paychecks to compensate. I’m thinking about putting 50% of the refund into my Roth IRA and 50% towards my car loan. Saving for the future and paying off debt! It’s a win-win.

  15. jebmatulich says:

    Home improvement and upgrades.

  16. jebmatulich says:

    Home improvement and upgrades

  17. Freedom 48 says:

    No tax refund here.  We pay out our noses at tax time.  If we did get a refund I’d be sticking it straight into retirement savings.  Quick and painless… it’ll feel like you never had it.

  18. For me I will be taking a holiday and saving the rest for a rainy day as my savings are too low at present!

  19. Donna Freedman says:

    Last year I was due a refund but simply applied it to the next round of quarterly taxes. This year I got income from extra, one-time sources and didn’t pay enough — so I *owe* money. Much, much prefer it the other way. 🙁

  20. Bible Money Matters says:

    No refund for me this year. 🙁 underestimated income, thus I’m cutting a big fat check.

  21. I had the IRS direct deposit my tax refund directly into my “House Fund” savings account. Out of sight, out of mind. Plus I’m now so much more closer to my house down payment goal!