Investing Your Tax Refund Now Will Pay Off

If you’ve received a tax refund this year, or if you expect to receive one next year, what is your plan for the money?

One option is buying a long-awaited luxury, but financially astute investors know there are alternatives that might be more beneficial in the long run. Below are details on three of them:

Invest the money in an Individual Retirement Account (IRA).

The earlier you invest, the more you benefit from compounding.

As a hypothetical example, let’s assume you invest $3,000 in an IRA each year for the next 10 years, and the IRA grows at 8 percent. If you make the contribution at the end of each year – in December – the account could grow to $44,589, according to Thomson Financial Company. But if you make the contribution earlier each year – say, in April – you’ll end up with $46,936.

That’s because, by making the contribution earlier, you’ll gain an additional nine months of tax-deferred compounding.

Give your child or grandchild a gift.

The Uniform Gift to Minors Act and Uniform Transfer to Minors Act allow individuals to create a custodial account for the benefit of a minor.

Let’s assume you’d like to help your 10-year-old granddaughter save for college, so you start investing $200 per month and continue doing so until she turns 18. Assuming a hypothetical average annual return of 8 percent, she will have $36,457 in her account when she reaches age 18.

Hire a financial advisor.

Everyone likes receiving a tax refund, but it isn’t necessarily a good thing. Getting a refund means you overpaid throughout the course of the tax year – a fact that essentially means you’re loaning money to the government, interest-free. A financial advisor can tell you how to better plan so you can have that money through the year.

The tax and legal information in this article is merely a summary of our understanding and interpretation of some of the current laws and regulations and is not exhaustive. Investors should consult their legal or tax counsel for advice and information concerning their particular circumstances.