Though the IRS has been a little slow to process tax refunds this year, so far, the average filer who received money back on a 2020 tax return collected $2,827, according to the National Taxpayer Advocate. If you're sitting on a pile of cash that size, you may have a lot of big plans for it.
A lot of people are eager to get out and travel this summer, and $2,827 could buy you a really nice trip. Or, if you've landed in debt, $2,827 could help you work your way out of that hole.
But if you aren't in debt and you don't need to pad your emergency savings, then it pays to put your tax refund to work by investing it. And if you play your cards right, you may be able to grow a $2,827 windfall into $100,000 or more.
Go heavy on stocks
When you buy stocks, there's no guarantee that you'll score a specific return. But over the past 10 years, the S&P 500 index has generated an average annual return of over 14%.
Granted, that index, which consists of the 500 largest publicly traded companies, has had a strong run over the past decade. But if you invest in S&P 500 stocks on an individual basis, or buy S&P 500 index funds with your tax refund, then you may generate solid returns that turn that sum into a heaping pile of money.
Now because the past 10 years have been so strong for the stock market, it's best to assume a more conservative return on investment for the next 10 years, and also beyond. But let's shave a number of percentage points off of that average and assume that for the foreseeable future, a broadly invested stock portfolio will generate an average annual 9% return. If you're sitting on a tax refund worth $2,827, and you invest it all and leave it alone for 42 years, you'll wind up with a cool $105,000.
Of course, stocks aren't the only investment choice for your tax refund. You could also put that money into bonds, which are far less volatile. But should you expect an average annual 9% return from bonds? Not even close.
Now, you may also be tempted to invest some or all of your tax refund in cryptocurrency, since it's all the rage right now. That might make you some money in the near term. But digital coins haven't been around nearly as long as stocks, and so it's hard to determine whether they're a viable long-term investment or not.
Or, to put it another way, you might grow a $2,827 tax refund into a larger sum by investing in cryptocurrency. But will digital coins enable you to turn that sum into $100,000? Maybe not.
The funny thing about tax refunds is that they actually mean you overpaid the IRS during the year and are now getting the cash that's rightfully yours. But if you're sitting on a lump sum, it pays to invest it. Doing so could leave you much richer than you may have ever imagined.