Four Ways to Spend Your Tax Refund
Everyone loves extra money; especially in the form of a large tax refund. Americans' first impulse is to spend their entire refund on a car, clothes or other material objects. However, if servicemembers spend that money wisely, for example in an individual retirement account (IRA), the refund can last them a lifetime.
June Walbert, a financial planning expert with USAA Financial Planning Services, offers her advice on four good investments for a tax refund:
- Open a Roth IRA: Invest in your long-term financial health by using your tax refund to open a Roth IRA, which can be opened for as little as $250. This money, which will grow over time due to compounding interest, can be withdrawn tax-free at retirement; a big benefit over the Thrift Savings Plan (TSP).
- Save for a downpayment: If home ownership is one of your financial goals, a tax refund can jump-start your down payment savings. But be sure to save the money separately from your basic checking and savings accounts, such as in a money market account, where it will earn more interest and be harder to spend on the non-essentials.
- Hire an expert: Consider using a tax refund to help ensure your finances are on the right track by hiring a credentialed financial planner. Basic financial plans can be as little as a few hundred dollars; a small investment in your long-term financial health.
- Use the rule of thirds: If you're unsure of where to put your tax refund dollars, you can fall back on the "rule of thirds:" put a third toward savings, a third toward consumer debt (like credit cards), and a third toward something fun.
What's more, if you receive a big refund this year, such as $1,000 or more, it's a good idea to revisit your W-4 to ensure you're withholding the right amount of money. Instead of giving Uncle Sam an interest-free loan during the year, make sure those funds go into your paycheck so they can be put to better use during the year.
Spending money on new cars and clothes can be fun, but it won't give servicemembers an opportunity to build long-term wealth. It's important to invest money wisely and to resist the urge to spend a tax return on impulse purchases.