Financial Benefits Of Investing Your Tax Refund

Save, Don't Spend

Financial Benefits Of Investing Your Tax Refund
March 13, 2017

For many people, tax refund day is like Christmas in the spring. As they prepare their tax returns over the next few weeks, millions of Americans will hold their breath in anticipation of how much their tax refund is going to be — and then run to the mailbox every day hoping to receive their "gift" from Uncle Sam.

Last year, 111 million refunds were issued, which amounted to an average individual income tax refund of $2,860. Most people have big plans for how they're going to spend their refund: a new big-screen TV or home entertainment system, a fancy summer vacation, a down payment on a new car or boat, or new jewelry or clothes, for example.

But here's a different idea: Don't spend your tax refund — invest it instead. No, investing your tax refund won't be nearly as much fun as spending it. Nevertheless, it will almost certainly end up being a more beneficial financial decision.

Let's assume you receive the average tax refund of $2,860. If you invested this in your 401(k) plan and earned a 6 percent average annual return (compounded annually), your money would grow to nearly $16,000 in 30 years. That is a nice little boost to your nest egg. If you did this every year for 30 years (assuming an annual contribution of $2,860 earning the same return), your 401(k) balance would surge to almost $240,000!

Reducing debt is another wise financial choice for your tax refund, especially if you have high-interest credit card debt. Putting your tax refund toward paying down large credit card balances could save thousands of dollars in interest over the long term.

However, the smartest financial move when it comes to your tax refund is to not receive it in the first place. A tax refund represents the amount of money that you overpaid to the government in income taxes — the government is just giving your money back to you. When you receive a tax refund, what you have really done is given Uncle Sam an interest-free loan. Every pay period, you lent some money to the government; when you file your taxes the following year, you are just getting back what was yours all along.

Instead, talk to your payroll department about adjusting your federal income tax withholding so that less tax is taken out. This will increase your take-home pay each pay period. For example, if you receive a tax refund of $2,900, adjusting your withholding could increase your paycheck by about $111 per pay period if you are paid every other week.

While your tax refund might seem like "found money," it's not — it's your money. So make wise financial decisions about what to do with it. One of the best decisions is to make your refund go away by getting more money every payday.

Calculate your tax bracket.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

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brittany.martinez530 | 03.13.17 @ 18:03
I have always tried to always put a portion of my tax return money away into savings just to be on the safe side, but I never thought about investing it before. This was a great article with a lot of wonderful tips .
Zanna | 03.13.17 @ 20:36
We do use any refunds to pay down debt, or put into savings. Unfortunately those unexpected expenses tend to eat into our savings, even when we do have a good 'rainy day' fund set aside. I'd rather have a reduced tax, reflected in a better monthly budget, instead of a refund.
Erin | 03.13.17 @ 20:49
This is good advice for those who are expecting refunds. Over 30 years, that adds up to a nice chunk of change to have for retirement. Hopefully we'll be able to do that next year since we won't be getting a return this year.
Nancy B | 03.14.17 @ 16:45
I know it is not financially wise but I do look forward to spending my tax refund. I also tend to pay big bills such as property tax and a Year's worth of car insurance. It just makes and you're easier to handle financially
Jane | 03.15.17 @ 18:37
I like the idea of paying down debt with a tax refund. I would choose my mortgage principal, because I have no credit card debt.
$commenter.renderDisplayableName() | 01.20.18 @ 19:26

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