Money & Policy

9 Smart Ways to Spend Your Tax Refund

Many of them will help you and your family financially

(9 Smart Things to Do With Your Tax Refund previously appeared on GoBankingRates.com.)

Roughly seven out of 10 U.S. filers will receive a tax refund, with the average amount reaching around $2,800, according to the most recent Internal Revenue Service data. If you're one of the millions of Americans expecting a tax refund this year, you might be wondering how to spend it.

Although it's tempting to blow the found money on a trip to the mall or a night on the town, your tax refund is an opportunity to do something smart with the cash. Here are nine possibilities:

1. Invest It

From buying stocks to putting money away in a college fund, there are several ways you can invest your tax refund. For example, you can use it to invest in a business, pay next year's taxes and more. Here are 4 ways you can safely invest your tax refund.

(MORE: Americans Get an "F" on Tax Quiz)

2. Open a 529 Plan

Andrew Schrage of Money Crashers told GOBankingRates last year: "Lots of people put off starting a 529 savings account or an IRA for a child because they think they can't afford it. Using a tax refund to do so is one way to get around that obstacle." A 529 is a savings plan that helps families pay for college. With this plan, you can also qualify for special tax benefits because your earnings are not subjected to federal (or state) tax. In other words, the distributions are tax-free. Find out how to use your tax refund to help your kids save.

3. Give Your Home a Facelift

Here are some inexpensive, but major, ways you can easily liven up your living space with your tax refund:

Under $100: Give your interior rooms a fresh coat of paint
Under $200: Replace your old kitchen and bathroom fixtures with shiny, new ones
Under $300: Replace the lighting in dark spaces with bright and efficient light fixtures
Under $400: Replace bathroom laminate floors with tile
Under $700: Add major curb appeal with fresh outdoor landscaping

(MORE: Tax Reform Agenda for Low-Income People)

4. Pad Your Emergency Fund

If you are one of the 60 percent of Americans who are financially unprepared for an emergency, then this might be one of the first things you should do with your tax refund. Putting your tax refund into an emergency fund can give your savings a major boost without requiring a lot of effort and can give you peace of mind. Many experts recommend saving at least six months’ worth of living expenses. Learn how to build an emergency fund with your tax refund.

5. Fund Your Retirement

By contributing your 2014 tax refund to an IRA, not only will you see significant savings on your 2015 taxes, you’ll also be making significant strides toward your retirement goals.

(MORE: 9 Changes That Will Affect Your Money in 2015)

If you are in a low tax bracket now, consider contributing to a Roth IRA. You won’t see the same savings on your 2015 taxes, but you won’t be taxed when you withdraw the funds during retirement. Here's how you can start a retirement savings account with your tax refund.

6. Pay Down Debt

Whether you use the debt snowball or debt avalanche method, using your tax refund to help pay down debt can remove a huge weight off your shoulders and save you tons in additional interest. It can also help you increase your net worth and improve your cash flow, which will assist you in reaching other important financial goals.

7. Donate to Charity

Making a donation to charity is a great way to serve others, give to those in need and improve your own sense of self. And there just so happens to be the benefit of a possible tax benefit as well. Donations to qualifying charities are tax-deductible, which can help you save more on next year’s taxes. Figure out if you can really write off that charitable donation.

8. Splurge 

If you’re already a super saver, don’t have any debt and feel confident with your investments, then go ahead and splurge — you deserve it. Just like we all need an extra cookie or slice of pizza every once in a while, treating yourself to a spending splurge can give you some relief from living on a budget. Just make sure you don’t go overboard.

9. Buy a Car

Do you have your eyes on a new car you've been dying to buy? If so, use your tax refund to put a down payment on it. Currently, auto loan interest rates are low, but they are expected to rise later this year. Now is the time to get a good deal on an auto loan. Read more about how you can use your tax refund for a car down payment.

Morgan Quinn is the Feature Editor at GoBankingRates and is the former Managing Editor at Mint.com.

By Morgan Quinn

Morgan Quinn is an experienced personal finance writer and her work has appeared on WSJ.com, Huffington Post and Slate. She is also the former Managing Editor of Mint.com.


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