These tips from CPAs can help you make the most of your tax refund.
CHICAGO, April 29, 2024 – Tax
season is behind us, and if you’re one of the millions of Americans
getting a tax refund this year, hopefully it’s already in, or will soon
be hitting, your savings account. Whether large or small, there are some
smart money moves you can make to set yourself up for financial success
in 2024 and beyond. Here, the Illinois CPA Society shares three
recommendations for putting your refund back to work for you.
- Secure your emergency savings. A recent Bankrate survey found
that more than half of American adults (56%) lack sufficient savings to
shoulder an unexpected $1,000 expense, while nearly one in four (22%)
have no emergency savings at all. If you fall into either category, or
if your emergency savings just doesn’t seem like it can cover you during
a dicey “what if…” scenario, using your tax refund to give it a
necessary boost is never a bad idea. A great goal is to have at least
six months of living expenses in an accessible, interest-bearing savings
vehicle, like a high-yield savings account or callable certificate of
deposit.
- Pay down debt. Total U.S. household debt rose
to an all-time high of $17.5 trillion last year, including more than $1
trillion in credit card debt. If you’re incurring interest expenses on
loans and credit cards, using your tax refund to pay down a chunk of
debt is the equivalent of giving yourself a raise. Think of it like
this, if you have $10,000 in credit card debt incurring an 18% interest
rate fee each month, you need to earn $2,250 a year (pre-tax) just to
pay the interest! If you were to get a $5,000 tax refund and use it to
pay down your credit card debt so you incur less interest, it would be
the same as if you earned a raise of more than $1,000. It’s often
recommended to pay down debts incurring the highest interest rates and
charges first, along with those with interest rates greater than what
your savings accounts are paying. Going from being an “interest payer”
to an “interest earner” is one of the most important financial
transition points in anyone’s lifetime, and the faster this happens, the
sooner you can allocate more income toward your future well-being.
- Invest for the long term: Making long-term
investments is critical to having a healthy financial future. Once your
emergency savings is established and your debt is manageable, funding
retirement accounts and making other investments should become a
priority. Great places to park a tax refund could be an individual
retirement account (traditional or Roth IRA), health savings account
(HSA), TreasuryDirect account, or even a taxable brokerage account.
Funding one or more of these accounts could be in your best interest
depending on your investment goals and risk tolerance. And while each of
these account types offer access to different investment vehicles
(i.e., stocks, bonds, mutual funds, etc.) and have different income and
tax considerations to account for, the bottom line is that investing for
the long-term is a savvy savings strategy.
Overall, the importance of setting yourself up for financial success
cannot be discounted, and your tax refund might be the perfect way to
get your savings on track. Of course, a CPA—a certified public
accountant—can help guide you toward the best place to park that cash.
Your CPA can help you maximize your tax refund, make a financial plan,
and manage your finances today and well into the future. The Illinois
CPA Society’s free “Find a CPA” directory can help individuals find the
trusted, strategic advisor that’s right for you based on location, types
of services needed, and languages spoken. Find your CPA at www.icpas.org/findacpa.
