What could you do with over $3,000 in your pocket? A lot, right? Well, if your tax refund is anything like the average direct deposit tax refund last year, you could be expecting a little over $3,000 for your tax refund. So what should you do with that money when it comes?
The smartest thing you can do is to contribute to your retirement account as it has the longest term impact. The younger you are, the smarter that choice is since the money will have years and years to grow tax-deferred or tax-free.
Here are some tips on how to do that:
- If you have a 401(k) or 403(b) plan through your employer that allows you to contribute to your retirement account and you haven’t been contributing the maximum, ask your employer to temporarily increase your monthly contributions by an even amount up to your total tax refund. Those additional contributions will come out of your paychecks so your paychecks will be less each payday, but your tax refund will offset the additional amount you are having automatically deducted and contributed to your retirement. Additionally, because contributions to your 401(k) or 403(b) retirement are tax-deferred, you will lower your taxable income. You can use this strategy for the rest of the year until your tax refund amount is exhausted and your retirement account will grow. If your employer matches your contributions, it’s an even bigger win. Pretty slick planning, huh? The maximum you can contribute to an employer-provided retirement account like a 401(k) or 403(b) is $20,500 in 2022 ($27,000 if you are 50 or over).
- If you are already contributing the maximum allowable to your 401(k) or don’t have that type of plan available through your work, you likely can still contribute to another type of retirement account like an IRA if you have earned income. You may be able to contribute up to $6,000 ($7,000 50 and over), and if you contribute to a traditional IRA, you may be able to take a deduction on your taxes for the contribution. If you contribute to a Roth IRA, you won’t be able to take a deduction for your contributions, but it still makes sense to invest in one as the money will grow tax-free forever and you will not be taxed on your distributions at retirement.
- If you don’t have earned income because you are retired or unemployed, you can still set funds aside for retirement even though they aren’t in a tax-deductible retirement plan. Just be sure they are in a separate account that you ignore when you are thinking about spending money now. Repeat after me: these funds are for retirement — they aren’t available to me now.
While saving money for retirement, you also may be eligible for the Saver’s Credit up to $1,000 single ($2,000 married filing jointly) at tax-time just for investing in your retirement.
All saving and no spending can feel pretty onerous, so if that’s the way my advice is occurring to you, set some of your tax refund aside to spend in any way that you want. Spending 10% while saving 90% of your refund will keep your mood elevated while you boost your retirement savings. That’s the best of both worlds! These are just a few basic examples of how your tax refund can help grow your retirement.
Don’t worry about knowing these tax rules. TurboTax will ask you simple questions and give you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live tax expert and get your tax questions answered from the comfort of your couch. TurboTax Live tax experts are available in English and Spanish, year round and can also review, sign, and file your tax return or you can just fully hand taxes over to them all from the comfort of your home.