In return for the drudgery of filing an annual tax return, many people will enjoy the reward of a nice, juicy refund from Uncle Sam. But with the right strategy, that check you get back from the government could become worth much more than its face value.
In truth, you shouldn't want a tax refund. In most cases, a check from Uncle Sam means your employer withheld too much of your earnings. The surplus represents an interest-free loan from you to the government. If you'd rather keep more of that money in your pocket, talk to your employer's human resources department about adjusting your withholding.
Still, as long as you've got that refund check, you might as well use it Foolishly.
Appreciate, not depreciate
Many people treat tax refunds as a windfall. But splurging on a large-screen TV or a new iPad means you've just turned that surplus cash into a depreciating asset. Before you lay down those Benjamins, consider the alternatives.
If you plunk that $3,000 into an asset that appreciates, instead of losing value over time, you'll get far more for your money than the fleeting satisfaction of gadget supremacy. Check out how $3,000 would have grown over the past decade in some of the market's best stocks:
|
Company |
10-Year Avg. Annual Return |
$3,000 Would Grow To |
|---|---|---|
|
Medifast |
48.4% |
$155,000 |
|
Green Mountain Coffee Roasters |
53.6% |
$220,000 |
|
XTO Energy |
38.7% |
$79,000 |
|
Hansen Natural |
54.9% |
$239,000 |
|
Southwestern Energy |
21.6% |
$149,000 |
Data from Yahoo! Finance.
Sure, most of us won't know today which stocks will be the best over the coming decade, but there are ways to up your odds of getting great returns. Your money can even grow well for you in less rocket-like performers:
|
Company |
10-Year Avg. Annual Return |
$3,000 Would Grow To |
|---|---|---|
|
Target |
5.3% |
$5,000 |
|
General Mills |
10.6% |
$30,000 |
|
Lowe's |
7.5% |
$6,000 |
Data from Yahoo! Finance.
Turning $3,000 into $5,000 over a decade might not seem like much -- but it's better than simply frittering that cash away.
Remember the Roth
A Roth IRA makes a particularly good way to invest your tax refund in stocks. You'll likely be able to withdraw any earnings amassed in a Roth completely tax-free once you reach retirement. You may not even realize this, but unless you're reading this after April 15, it's still not too late to make a contribution to an IRA for the tax year 2009! You can designate any IRA investments made before that deadline as 2009 or 2010 contributions when you fill out your tax forms.
The current maximum IRA contribution is $5,000 for most folks, or $6,000 for those 50 or older. Those sums might not seem like much, but if you contribute $5,000 per year for 25 years, and you earn an annual average of 10%, you'll end up with about $540,000!
A guaranteed 25% return
Finally, here's one more way to turn your tax refund into an instant big payoff: Use it to pay down any credit card debt you're carrying. Many folks with such obligations are also saddled with ridiculously steep interest rates of 25% or more. If that's you, and you pay off $3,000 of debt with your refund, you could instantly save yourself at least $750 in interest payments!
We're not saying a big-screen TV isn't dazzlingly shiny. But a smarter, more Foolish use of your tax return could be an even bigger, brighter contribution to your future.
