The COVID-19 pandemic has placed millions of Americans in a tough spot financially as they're out of work for the foreseeable future. Whatever plans they may have had for their tax refunds before this have likely changed since it's become increasingly important to beef up your emergency fund. But if you're still working and you already have a solid emergency fund, you might be better off putting your money to work for you.
Here are five suggestions for using your tax refund that can either help you save money or grow your wealth. You won't see results right away, but the long-term benefits could be much more significant than a few thousand dollars.
1. Debt repayment
Many lenders are enabling customers to defer payments right now, but that doesn't mean you stop owing your balance. Paying off debt can permanently free up more cash for you every month, and it can also save on interest. Consider putting your tax refund toward your debt first, especially if you have high-interest credit card debt. If you have multiple debts, put your tax refund toward the debt with the highest interest rate first. Once you pay that off, you can put any leftover funds toward your debt with the next-highest interest rate, and so on.
Some auto loans, mortgages, and personal loans might charge you a prepayment penalty; that is, a penalty if you pay your loan off ahead of schedule. In this case, you might not save that much by paying your loan off early, so you may want to stick to your original payment schedule. Check with your lender if you're unsure whether your loan charges a prepayment penalty.
2. Your retirement
Retirement is the most expensive goal you'll ever have, and it'll cost most people today $1 million or more. Use your tax refund to help you achieve that goal by placing that money in an IRA. You're allowed to contribute up to $6,000 to an IRA in 2020 or $7,000 if you're 50 or older. Traditional IRA contributions reduce your taxable income this year, but then you pay taxes on your distributions in retirement. Roth IRA contributions don't affect your taxable income this year, but then you don't owe taxes on your retirement distributions.
Money you place in your IRA will also grow over time, assuming you've invested your money wisely. The longer the money remains in your retirement account, the more time it will have to grow, and this can reduce how much of your own money you must put toward your retirement. A $2,000 tax refund invested for 30 years with a 7% average annual rate of return would end up worth over $15,000. By investing your tax refund instead of spending it, you could increase its value many times over.
3. Professional development
Consider using your tax refund to cover the cost of professional development courses that might help you move up in your career. If you own your own business, you could also try putting that money into new technology or marketing materials to help expand your services and customer base.
Investing your money into your career could lead to a promotion and a higher salary, which could give you even more cash to spend on your wants in the future. See what kinds of opportunities are out there to help you grow your professional skills and your network. Weigh the costs of these opportunities against the potential benefit to decide if it is worth it.
4. Renovations that will improve the value of your home
If you anticipate selling your home in the future, using your tax refund to do some upgrades could be worth the effort. Upgrades that improve the value of the home could increase your sale price and net you even more money when you do finally sell the home.
Not all upgrades actually help a home's value, though. Adding a swimming pool, updating utilities, or changing out your bathroom fixtures might seem like things buyers would be willing to pay top dollar for, but this isn't always the case. Improving curb appeal and adding energy-efficient appliances will usually help raise the value of your home. Redesigning an older home to have a more open-concept floor plan will also appeal to today's buyers.
5. Donate to a good cause
There are hundreds of worthwhile charities seeking funds to advance medical research, help disaster victims, and provide people in need with basic items and services. Giving your tax refund to one of these causes will help others, and it can also give you a tax break. If you keep your receipts, credit card statements, or bank statements showing what you donated, you can write this amount off on your taxes.
Only donations to qualifying tax-exempt organizations are tax-deductible. You can find a qualifying charity by using the IRS' Tax-Exempt Organization Search tool. You could also try reaching out to the organization to check whether your donations will be tax-deductible.
If you think you'll need your tax refund to cover your basic expenses during COVID-19, definitely keep it in a savings account, at least until the crisis is over. But if you aren't that worried about your finances, consider one of the other options listed here.