We've talked about how it isn't ideal to expect a big tax refund, but sometimes you can't control your life events and you do end up getting a lot of money back from your overpayment. If that happens, you should definitely allocate a portion of that money to savings.
For most people, a refund of overpayment of income taxes is the largest unallocated chunk of money they'll have all year. This makes it the ideal way to fund savings. Types of savings you might want to consider:
- Emergency fund
- Retirement accounts
- Car replacement account
- Vacation fund
- PCS savings
- Special needs trust
- Down payment account
- House renovation savings
- College savings
Many different ways exist to turn a refund into savings, and I learned about a new way while researching this post. You can have your entire refund deposited into your savings account, then transfer the part that you're not saving. You can put it into your Individual Retirement Arrangement (IRA) account. You can transfer a portion of the refund into a savings account. The new thing I learned: IRS Form 8888, Allocation of Refund, allows you to divvy up your refund and send it to multiple accounts, and buy savings bonds. How cool is that?
If you've already received an income tax refund, I hope you have some left to put into savings. If you are expecting a refund, but haven't received it yet, plan to put at least some of the money into savings. If you haven't filed, think about where you will want to put that money if you receive a refund.
Take advantage of this opportunity to jump-start your savings without stretching your regular monthly budget. It's a smart investment in your future.
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