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Tax season is officially upon on. That means it’s time for everyone to collect the proper paperwork, get out their calculators and tax refund software to submit their records to the IRS. Let’s discuss some investment tips for Tax Refunds.

The good news is that, after you submit them, you’ll hopefully be receiving a tax refund of some sort. These come in all shapes and sizes, but they’re helpful nevertheless.

In fact, there are several things that you can do with them. Some smart, some not so smart. How should you handle the tax money you receive?

Here are several great ways to invest your tax refunds and provide you and your family some financial relief in the process.

1. Build an Emergency Fund

There are those out there reading this that fall into one of three categories:

  1. You either have no current emergency fund
  2. You have one but don’t have much in it
  3. You have one that’s filled up and ready to be used

If you don’t have a sizable emergency fund, then you could end up in severe financial trouble after one unforeseen incident.

For example, say you don’t have any money in an emergency savings account and your car breaks down to the point of needing a big-time repair.

Because you don’t have any emergency funds, you’re forced to pay for it either out of your checking account (if you have that amount) or go into debt to pay it.

The ruling on how much you should have in your emergency fund varies from expert to expert. However, they all can agree that three months’ worth of savings is a comfortable amount.

That way, if you’re ever laid off of work, you’ll still be able to provide for you and your family with a bit of wiggle room to find a new job.

2. Split It Among Several Accounts

Sometimes a large windfall is too tempting to manage responsibly. Did you know that the IRS has the ability to split your tax refund into as many as three separate accounts? Use that to your advantage!

Split up the refund across multiple accounts so it’s not as noticeable, but each account still gets a small bump to boost the investment and receive compounding interest on it.

For example, you can have part of it sent to your checking account to use for a fun family activity or two, but then send the remaining amount to your savings account for a future goal. 

The fact is that you could probably use a jolt of cash in more than one way. Do just that by splitting your refund up, rather than placing it all towards one part.

3. Put Money Aside for Your Future

Many people make the mistake of retiring and attempting to live off of the Social Security that they’re given. Ask any elder who’s done that and they’ll tell you it wasn’t the best decision they made. Now, in their later stages of life, they’re having to take out loans or work to gain extra income.

Don’t put yourself or your family in that situation. Make smart investment tips for tax refunds now that can pay off in a big way down the line.

One of the best things you can do to save for retirement is by investing in an IRA account.

Depositing your return in a tax-advantaged retirement account can mean you get to enjoy additional tax benefits and potentially a bigger refund next year. But keep in mind there are limits to how much you can contribute to a traditional or Roth IRA each year.

For 2019 and 2020, your total contributions to IRAs cannot exceed $6,000 (for individuals under age 50). So, if you have already make regular deposits to an IRA, be sure to only deposit a certain amount. For example, if you have $200 automatically deposited each month to your IRA, only send $3600 of your tax refund to the IRA.

Don’t currently have one opened? No problem! What better time to start than when you’re getting hundreds, if not thousands, of dollars to kickstart that investment? It can be a tremendous asset to saving towards your future. How can you make wise investment tips for tax refunds?

4. Pay off Current Debt

There are more ways to protect your financial future than investing. In fact, the best thing you can do for your future is to pay off your current debt.

Debts with high interests can be your biggest challenge financially. But if you were to place a sizable payment, such as your tax refund, then you can stop the interest from growing and pay them off quicker simultaneously.

For your specific situation, this could be in reference to things such as credit card debt, a car loan, mortgage, student loans, cash advances, personal loans, etc. Whatever that looks like for you, it’s time to take back control.

One of the best things you can do to save for retirement is by investing in an IRA account.

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5. Budget the Return

As previously mentioned, you probably have several aspects of your finances that could use a bump.

This applies to many Americans and they don’t even realize it. In fact, they couldn’t tell you what aspects of their finances need the most attention.

Use your upcoming refund as a way to view your current financial situation and see what improvements need to be made.

Granted, those improvements won’t happen overnight. But, by being more conscientious of them, you can start to set aside portions of the tax return towards them.

For example, if you decide that building your emergency fund and paying off your student debt are the top priorities right now, then split your refunds towards them.

6. Buy Term Life Insurance

If you have a family, a life insurance policy is a must-have. If you’re getting a tax refund, chances are that it can pay for a good portion of a term life insurance policy.

Term life insurance is affordable and customizable. A healthy 35-year-old male can buy a $500,000 term policy that will last until he’s 65 years old for only $420 annually.

Open an interest-bearing savings account, deposit your tax refund directly to it each year, and use the account to pay your policy premiums. Paying your premiums annually versus monthly can save you money.

Example:

John Smith is 35 years old and buys a 30-year $500,000 term life insurance policy, naming his spouse the beneficiary. His policy costs $420 annually.

He decides to put $1000 of his tax refund each year into a savings account that bears 1.10% compounding interest. He plans on making one withdrawal of $420 each year to pay his term policy premium.

Date Payment # Principal Transactions Interest Balance
15-Apr-20 1 $1,000.00 $580 $17.38 $1,597.38
15-Apr-21 2 $1,597.38 $580 $23.95 $2,201.33
15-Apr-22 3 $2,201.33 $580 $30.59 $2,811.93
15-Apr-23 4 $2,811.93 $580 $37.31 $3,429.24
15-Apr-24 5 $3,429.24 $580 $44.10 $4,053.34
15-Apr-25 6 $4,053.34 $580 $50.97 $4,684.31
15-Apr-26 7 $4,684.31 $580 $57.91 $5,322.21
15-Apr-27 8 $5,322.21 $580 $64.92 $5,967.14
15-Apr-28 9 $5,967.14 $580 $72.02 $6,619.16
15-Apr-29 10 $6,619.16 $580 $79.19 $7,278.35
15-Apr-30 11 $7,278.35 $580 $86.44 $7,944.79
15-Apr-31 12 $7,944.79 $580 $93.77 $8,618.56
15-Apr-32 13 $8,618.56 $580 $101.18 $9,299.74
15-Apr-33 14 $9,299.74 $580 $108.68 $9,988.42
15-Apr-34 15 $9,988.42 $580 $116.25 $10,684.67
15-Apr-35 16 $10,684.67 $580 $123.91 $11,388.59
15-Apr-36 17 $11,388.59 $580 $131.65 $12,100.24
15-Apr-37 18 $12,100.24 $580 $139.48 $12,819.72
15-Apr-38 19 $12,819.72 $580 $147.40 $13,547.12
15-Apr-39 20 $13,547.12 $580 $155.40 $14,282.52
15-Apr-40 21 $14,282.52 $580 $163.49 $15,026.01
15-Apr-41 22 $15,026.01 $580 $171.67 $15,777.67
15-Apr-42 23 $15,777.67 $580 $179.93 $16,537.61
15-Apr-43 24 $16,537.61 $580 $188.29 $17,305.90
15-Apr-44 25 $17,305.90 $580 $196.74 $18,082.65
15-Apr-45 26 $18,082.65 $580 $205.29 $18,867.93
15-Apr-46 27 $18,867.93 $580 $213.93 $19,661.86
15-Apr-47 28 $19,661.86 $580 $222.66 $20,464.52
15-Apr-48 29 $20,464.52 $580 $231.49 $21,276.01
15-Apr-49 30 $21,276.01 $580 $240.42 $22,096.43
Years Invested Transaction Count Initial Investment Periodic Transactions Interest Earned Pre-Tax Savings
30 30 $1,000.00 $42,600.00 $3,696.43 $22,096.43

Income Taxes: $924.11
Savings After Income Taxes: $21,172.32
Cumulative Inflation: 51.00%
Purchasing Power After Inflation: $10,373.75

Using the savings growth calculator from SavingsCalculator.org you can see that even if John outlives his term policy, his savings account strategy gives him a small investment while still ensuring his family was financially protected during his prime earning years.

If John dies during the 30-year term when his policy is active, the premiums are no longer required and his spouse receives $500,000 (the death benefit of the term policy) in addition to the balance of the savings account if John also named his spouse the beneficiary of the savings account.

Check out pricing with a term life insurance quote now.

Investment Tips for Tax Refunds: Use Your Tax Refunds to Your Advantage

Not all Americans have the luxury of receiving a refund after submitting their taxes. Use the refund as an opportunity to invest in your biggest financial needs, whether it’s to pay down debt or buying in a term life insurance policy. If you still have questions about investment tips for tax refunds, feel free to check out the additional resources above.

At Quotacy, we understand the importance of being able to provide for your family. Life insurance is essential to keep your family’s life in balance and save them from having to leave behind the future you’re helping them shape today.

See what you’d pay for life insurance with free quotes today.

 

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Greg Lewerer

Director of Creative Strategy

Greg is Quotacy’s Director of Creative Strategy. He has an eclectic past from working on movie scripts to creating ad campaigns for major brands. His love of creative solutions drove him to strategy, and he now uses his powers to help families protect their loved ones. Outside of work, Greg spends his time off the grid hunting, fishing, camping, biking, hiking, and walking his dogs.