8 Smart Ideas on How to Make the Most of Your Tax Refund

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We all know the theory – pay down your credit card debt, build up an emergency, invest in a retirements plan and adjust your withholding in case of a big tax refund. But, in practice, cruising to Hawaii or buying a large flat-screen TV is much more appealing. However, if you want to maximize your tax refund and make the most out of it, here are 8 smart ideas that could be the perfect fit for you.


Boost your retirement savings

Saving for retirement should be one of your main concerns. “If you didn’t contribute the maximum amount to your IRA, then funnel your refund into that account,” says Thomas J. Williams, a tax accountant and co-founder of online Deducting the Right Way.

Use your tax refund to open or contribute to a Roth IRA. It’s tax-free money that can help you live a comfortable life later on in life. “If tax rates go up for you this is a big win,” says Jason Matthews, president and CEO of Matthews Financial & Insurance Solutions in Oakland, Calif.

Another open would be to transfer the money into your health savings account (HSA). If you are eligible to contribute to a health savings account, you can boost your savings with your tax refund. “An HSA is one of the most powerful retirement security accounts we have available to use today. Contributions are pre-tax. The account balance grows tax-deferred if you don’t use it for medical expenses. And distributions can be income tax-free if used for qualifying expenses,” says Brent Weiss, CFP and chief evangelist of Facet Wealth in Baltimore.

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Pay off holiday debt

Holiday debt is easy to accumulate but harder to pay off. In fact, according to a study from The Motley Fool, 18% of people aged 45 and older carried debt into this past holiday season. 5.35% of those people are planning to use their tax return to get rid of their debt. If you’ve recently received a big refund, do the same!


Increase your insurance

People aged 65 and over have 70% chances of needing long-term care. “The average cost of long-term care is over $6,800 a month and can kill your nest egg,” Matthews says.

When it comes to life insurance, “it could be a lifesaver for your family after you’re gone,” says Eileen Maki, a tax analyst with FitSmallBusiness.com in New York City. If you already have an insurance policy, make sure you’ve got everything covered. “Making sure your last wishes are not a burden to your family as well as making sure they are cared for in your absence is the most loving thing you can do for them,” Maki says.

You can also use your tax refund for your cash value life insurance. “If you have a cash value life insurance policy that is designed for cash value, dump some of your tax refund into the policy. Make sure you speak with your life insurance agent first to find out how much you can contribute without making it taxable,” Matthews says.

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Invest in your home

If you’ve done your math and you’re in a good financial situation, then “using your tax refund to maintain or improve your home is a sound investment,” Maki says. She recommends making energy-efficient improvements that will not only add value to your home but also help you lower your bills and save money in the process.


Set your finances on the right track

When it comes to your financial future, a financial specialist can help you a great deal by shedding light on many money-related aspects. According to Logan Allec, a CPA and owner of personal finance blog Money Done Right, “taxpayers should use part of their tax refunds to pay for financial counseling and planning services.” It’s in your best interest!

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Invest in your future

Your tax refund can also go into certain classes and resources you might need to finance a hobby, start a new career, or open a business. “We want to drive real purpose and impact in what many are calling the encore chapter,” Weiss says. “How can we make investments in education and development to prepare us to tackle our next exciting adventure?”


Treat yourself

It’s not always about saving. Sometimes, we just need a break so that we can come back stronger and more determined. “We should allow ourselves some room to celebrate and have fun. If you have a plan and you are on track to meet your goals, a tax refund can be a great way to pay for a short getaway or a nice vacation,” Weiss says.

“Think of it more as an investment in your health and wellness. We don’t always have to think about life experiences and vacations as expenses — they are important moments in life that allow us to recharge, enjoy the journey, and remain committed to our financial plan.” So, reward yourself, but do it responsibly!

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Cross an item off your bucket list

Is there something you’ve been meaning to do but never had the chance, the time or the financial means to do it? Now’s your chance. “Whether it’s an adventurous outdoor excursion, international travel, or something smaller like taking music or dance lessons, use your refund as the catalyst to just go for it. The great thing about financial planning is that it’s not just about reaching some destination. It’s about enjoying the journey and growing and learning along the way,” Weiss says.

In the end, no matter how you decide to use your tax refund, the main idea is to plan it now.  “Having an idea of how you will use the funds is always a good idea. If we have a plan when the refund finally hits our bank account, we are more likely to use it in ways that will support our financial life goals,” Weiss says.

You don’t have to stop at one thing. Sky’s the limit! “Think about three goals you are looking to achieve and spread your tax return between them. I always recommend making one of those goals a personal one. So maybe it’s saving for retirement, putting extra money in the 529 plan, and putting some money aside for a summer vacation. The key is to make a list of what matters most to you, so you are motivated to put that tax refund to good use,” Weiss says.

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