Thrifty Thinking: What to Do With Tax Refunds

When it comes to a tax refund, there is no better time than now to save and invest. With the markets at some of its highest levels ever and a bullish economic forecast in the near term, investors at all levels should prudently strategize ways to turn their current year tax refunds into longer term financial growth.

One way a savvy investor might consider doing with their tax savings is to sock it away for their retirement.  If an individual is currently enrolled in a 401(k) deferral plan, meaning that one will only pay taxes on contributions and earnings when the money is withdrawn in retirement age (beginning at 59 ½),  they might consider supplementing  their current income with the tax refund while increasing the 401(k). Although a participant in this type of plan cannot make a direct contribution to the 401(k), they may however increase their withholdings to the plan at any time. If your employer offers a percentage matching contribution type program as a benefit, this can add up quickly and be a great way to build one’s retirement. For example, let’s say you earn a $5,000 tax refund in the current year. You should be able to call your 401(k) administrator and have an extra $5,000 withheld from your salary over the course of the next year. Depositing the $5,000 in the bank to compensate for that would be the savvy move.

In the end there may be several different ways and astute long term benefits in using one’s tax refund to invest for things like retirement, paying off high interest debts, or even paying down one’s current mortgage. Assuming ones finances are in line, I believe investing in tax advantageous plans like IRAs and 401(k)’s. These plans can be some of investor’s best tools to maximize long term wealth. That’s why I always recommend using this method to invest most if not all of tax refunds that way.

More about Jordan Niefeld:

Jordan works for Gerstle Rosen & Goldenberg, P.A.,  which has maintained its reputation for excellence and client satisfaction in the areas of accounting, auditing, taxation, divorce and fraud forensic, business consulting, governmental, not-for-profit, litigation support, other real estate and construction accounting, as well as federal, state and local governmental accounting, auditing, and consulting services.