Several recent surveys found that most investors plan to save their tax refunds this year. And with an average refund of nearly $3,000 to use, many investors may want guidance on how to allocate these assets.
More than 100 million taxpayers filed 2017 tax returns as of April 6, 2018, according to the Internal Revenue Service (IRS). In addition, the IRS has issued a total of more than $226 billion in refunds with an average refund of $2,864 per individual taxpayer – representing a 0.5% increase over last year.
Many surveys indicate that the majority of people plan to put their refund into savings. GoBankingRates.com found that 43% plan to save their refund. In addition, 36% of taxpayers plan to pay off debt. Of course spending is also an option. Surveys found that 10% of respondents plan to use the money for a vacation, 6% want to put the refund toward a luxury purchase, and 5% will use the money for a necessary purchase.
Among those polled, men and women differed on the use of the refund for debt, with 40% of women stating they would pay off debt compared with 33% of men. At the same time, men in the survey had higher levels of debt than women. The majority of Millennials and adults age 65 and older plan to save their refund versus spend it.
An influx of extra cash can create an opportunity to contribute to retirement savings or other priority saving goals.
Here are some ideas for investors who may want to save their tax refund.
Pay off debt
Depending on the investor’s situation, paying down debt may mean reducing credit card or student loan debt. Consumer borrowing is on the rise. In February, the Federal Reserve reported that consumer credit increased at an annual rate of 3.25%. Revolving credit (credit card debt) increased by 0.25%, while non-revolving credit (including student and car loans) increased at a rate of 4.5%.
Add to an emergency fund
While many investors realize the importance of having some cash on hand for emergencies, it is not always easy to save. In a 2017 Federal Reserve survey, many investors (44%) reported that they would not be able to cover a $400 emergency expense without selling something or borrowing money. In addition, 23% of respondents said they experienced a major unexpected medical expense in the prior year that required an out-of-pocket expense. The study also found that 10% of adults (24 million individuals) still hold debt from an out-of-pocket medical expense in the prior year.
Opinions vary on how much people should save in their emergency fund, but the assets should cover basic expenses such as rent or mortgage and other regular payments, as well as extra funds for unexpected expenses including car repairs or medical costs. Some investors try to save enough to cover three to six months of living expenses. A professional advisor can help set a goal for this account, depending on the individual’s financial situation and ability to save.
Open a Roth IRA
Contributions to a Roth IRA are not tax-deductible, but the interest earned, as well as withdrawals in retirement, are tax free. Roth IRA accounts can also help savers establish tax-diversification among retirement assets, which can be used as a tax-smart strategy in retirement. Some investors may not realize that a Roth IRA can be used to help save for a child’s college costs, and if the money is used for education, the 10% early withdrawal penalty is waived.
Contribute to a 529 savings plan
Family members or friends can contribute to a 529 college savings plan on behalf of a child. Earnings grow tax free and are not taxed when used for qualified higher education expenses. For investors expecting to receive a refund this year, tax-filing season is an opportune time to consider taking that extra cash and investing it in the future.
For informational purposes only. Not an investment recommendation.
This information is not meant as tax or legal advice. Please consult with the appropriate tax or legal professional regarding your particular circumstances before making any investment decisions. Putnam does not provide tax or legal advice.