Put Your Tax Refund To Work—We’ll Show You How

You finally got your tax refund. Now what? We’ll show you how to put it to use so that you can get the most of your money.

coins going into slot

Today is the day you’ve been patiently awaiting. You’ve just received your tax refund. While some ponder a vacation on the beach, others—such as smart investors like you—think about how they can invest the funds for the long-term. There is no one right strategy on how to use your refund, but here are some smart money moves you may want to consider.

Pay down high-interest debt.

Credit cards and personal loans typically charge interest rates as high as 15% to 30% on outstanding balances. Using your refund to pay off this debt is a wise move because it helps you avoid future interest charges on your outstanding balance.

Many customers ask us the question—should I invest, or pay off debt? Check out this article if you aren’t sure where paying off debt falls on your priority list.

Build a rainy day fund

Like it or not, rainy days happen—and we need to be prepared to weather them. That’s why most financial planners recommend having a short-term savings account that holds 3 to 6 months’ worth of expenses. Unfortunately, not all of us have that much cash readily available to immediately access, which can expose us to additional risks in the event of an unexpected major expense or the loss of a job.

Consider opening a Safety Net to stash away cash for emergencies.

Increase your 401(k) contributions.

Although you generally can’t contribute directly to your 401(k) from your bank account, you can increase your contribution rate through your employer and use your refund to cover daily living expenses. First, make sure you contribute at least the amount that your employer will match, if they have a 401(k) matching policy. If your employer offers a Roth 401(k), still consider making contributions, which can provide tax-free income in retirement and a hedge against future tax increases.

If you are able, consider contributing the maximum amount for the year. For 2021, if you are under 50, the maximum contribution amount is $19,500. If you are age 50 or older, the maximum contribution amount is $26,000.

Contribute to your IRA.

If you are looking for another place to grow your retirement investments with additional tax benefits, consider contributing to a Traditional or Roth IRA. If you’re unsure which type of IRA is best for you, we have a tools and resources that can help you decide.

For 2020 and 2021, if you are under 50, the contribution limit is $6,000. If you are over 50, the contribution limit is $7,000. 

Remember that if you contribute earlier in the year, your future growth could be more than if you had contributed at the end of the year.

Invest in education.

Benjamin Franklin said it best when he stated, “An investment in knowledge pays the best interest.” Using your tax refund to save for education can turn out to be a wise decision. Tax-advantaged education savings accounts, like your state’s Section 529 plan, allow for your investments to grow tax-deferred. If the funds are used for qualified education expenses, you won’t have to pay taxes when you withdraw.

Donate to charity.

Giving feels good, but did you know it can also reduce your taxes? Donating to charity allows you to deduct your charitable contributions from your itemized taxes for 2020, while also contributing to causes you care about.

You can read more about the rules for deducting charitable contributions on the IRS website.

Make Energy-Efficient Home Improvements

Using your refund to make energy-efficient upgrades to your home can help reduce your utility bills. The U.S. Government currently has a number of incentives to promote energy efficiency that you can take advantage of. The amount you reduce your utility bills by can then be saved and invested to help maximize the benefit. Good for the planet, good for your wallet—energy efficiency is truly a gift that keeps on giving.

Get Started

Ready to save? Get started or log in to set up a Safety Net, contribute to an IRA, or start giving to charity. If you plan to use your tax refund to save towards other financial goals, learn how to prioritize each goal.

Please note that Betterment is not a tax advisor—please consult a tax professional for further guidance.