Taxes are the sort of task we all need to grin, bear, and get through. But for some people, there's a silver lining to having to go through the grueling process of rounding up paperwork galore: collecting a refund.
Now in reality, a large tax refund isn't something you should actually hope for. That's because all it really represents is money you were due to collect the previous year but didn't.
But still, most people would much rather receive a refund upon filing their taxes than have to write a check to the IRS. And while tax refunds so far are smaller this filing season than last, as of early March, the average refund taxpayers received was $3,028.
Now there's still about another month to go before 2022 taxes are due, so that average refund figure could change. And also, that average refund figure is just that -- an average. You may be in line for a smaller payday from the IRS, or a much larger one.
But no matter what your personal tax refund looks like this year, if you're not struggling with a lack of emergency savings or costly debt, it pays to invest that money for your future. And doing so might also result in a nice tax break along the way.
Use your refund for retirement savings
Many people rely on their tax refunds to pay off their credit cards or even cover essential bills. If that's the boat you're in, you may not have the option to put your tax refund dollars into an IRA or 401(k) plan.
But if you're doing fine managing your expenses and you don't have costly debt, then it absolutely pays to use your tax refund to add to your nest egg, or to start building one if you haven't yet had that opportunity.
First, if you put your tax refund into a traditional IRA or 401(k), you'll exempt some of this year's income from taxes, leading to a lower tax bill. And even if you decide to fund a Roth 401(k) or IRA, you'll still enjoy benefits like tax-deferred gains and tax-free plan withdrawals in retirement.
Most importantly, you'll be setting yourself up for more long-term financial stability. This especially holds true if you're fairly young and your money has a lot of time to grow.
Let's say you get a $3,000 tax refund this year and you're 35 years away from retiring. If you invest that money at an average annual 8% return, which is a bit below the stock market's average, you'll end up growing it into over $44,000. That could potentially be enough to pay your retirement expenses for a full year.
In fact, it's a good idea to plan to use your tax refund to boost your retirement savings every year -- especially if you're not in the habit of contributing funds regularly. While a tax refund certainly isn't free money, it's money that could do a lot for you if you sock it away in an IRA, 401(k), or another long-term savings or investment account.