As a Certified Financial Planner™, I am often asked by clients, “what’s the best way to use my tax refund?” My answer, as with virtually anything in finance, is always going to depend on where you are in life and what your needs are. Paying off debt is an important box to tick, and once that's done, investing your refund in an effective wealth-building vehicle like a Roth IRA has a lot of advantages. Some of my clients use their refunds to create college funds for their grandkids, and others who have scrupulously saved for decades finally give themselves a break and use their refund to enjoy themselves. Have fun, travel, go play a little – you deserve it!
It all comes down to where you’re at and where you want to be. When it comes to getting the most out of your tax refund this year, looking at a few common scenarios might help you decide what’s right for you.
You're a Retired High Net Worth Individual
If you’re a high net worth individual, you likely don’t have to go after debt, so if you’re done with your working years and you’re in the spending years, a popular option is to use your refund to cover future estimated taxes and avoid owing down the line. Basically, it’s like paying down your debt early.
You're Still Working and Saving
If you’re younger, working, and still accumulating wealth, then putting your refund into a stable, long-term savings account like a Roth IRA might be the best choice.
Here’s why:
- Having your money in the markets longer means more compounding interest.
- Once you reach 59.5, then you’ll be able to take that money out, tax-free.
- You'll also be able to pass that money down to your heirs tax-free as well.
- There’s no age limit, so you can take the money out penalty-free.
- There are no required minimum distributions, so you can save as long as you’d like.
The general rule of thumb is to put at least 15% of your annual income into a retirement account.
Of course, retirement funds aren’t the only option that makes sense. If you’re an entrepreneur or business owner, you might want to invest that refund in yourself and your career. For instance, you can use the cash to get a certification that will increase your future earning capacity, or invest it as capital for your company.
You're Looking for Options Outside Your Investment Portfolio
I’ve worked with many Baby Boomer clients who have diligently saved their whole lives and are not in the habit of spending money on themselves. Part of my job is to gently remind them that they’ve earned the right to enjoy the fruits of their labor and put their savings to use in ways that are meaningful for them.
Maybe, like me, you love baseball. If that’s so, you might want to use your refund to go on a baseball “road trip” and visit stadiums you’ve only seen on TV and cities you’ve never been to - or only experienced from the back seat of a car service on your way to a meeting from the airport.
Some of my clients travel to Europe to explore their roots. Many people find great fulfillment in doing things they’ve never done before. Breaking the mold a bit and exploring new passions is the reward you give yourself for being so fiscally disciplined all these years.
Maybe you’re thinking about the legacy you’ll leave your family. I’ve worked with numerous clients, for example, who have started college funds for their grandkids. That could be a satisfying way for you to pay your refund forward.
In the end, every client I work with has their own unique financial goals and vision for the future. After two decades as a Certified Financial Planner™, I can tell you that there truly is nothing more gratifying than seeing a financial plan come together to help make that vision a reality. It’s why I’m in this business! EP Wealth Advisors® gives you access to a full range of financial services, including retirement planning, tax planning and preparation, estate planning and analysis, and more.
When you put all of these services together, you get the kind of well-rounded expertise that can take your investment portfolio to the next level.
Disclosures:
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. Content does not involve the rendering of personalized investment advice, nor is it intended to supplement professional individualized advice.
- As the author of this piece, EP Wealth Advisors, LLC (“EPWA”) has tailored the messaging of this article to align with the categories, services, qualifications, capabilities and services that it offers and can service. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions with the appropriate professionals. EPWA makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of opinion by the author are subject to change without notice.
- EPWA is not in the business of providing tax or legal services or advice. Always consult your tax advisor and/or attorney regarding your specific situation.