4 places to put your tax refund so your money grows with little to no effort
- If you don't need to pay bills or outstanding debt with your tax refund, consider putting it to work.
- You can use your tax refund to save for short-term goals in a high-yield savings account or a CD.
- If your goals are several years into the future, consider investing the windfall in an IRA or brokerage account.
- Check out Business Insider's picks for the best tax software »
Getting a tax refund can quickly reverse the dread that hovers over tax season.
By the second week of February - a mere two weeks into filing season - the IRS had already paid out billions of dollars in tax refunds, according to filing statistics, with the average taxpayer receiving $1,952.
If you're expecting a refund this year, chances are you've fantasized about how you'll spend it. If you don't need the money to pay outstanding bills or high-interest debt, there are a few smart ways you can put the money to work.
1. High-yield savings account
High-yield savings accounts are ideal for storing cash you need (or may need) in the short-term, like for a down payment, a new car, a home repair, self-employment taxes, or travel expenses. Sure, you could keep the money in a checking account, but you'll see negligible growth and you may even be tempted to spend it.
The best high-yield savings accounts don't charge monthly fees and earn 15 to 20 times more interest on your money than a traditional savings account. You can use your tax refund to boost an existing savings goal or open a new account to get a big head start on the next one. Either way, rest easy knowing that your money is growing safely.
2. Certificate of Deposit (CD)
A worthy alternative to high-yield savings is a certificate of deposit, or CD. For money you don't need access to immediately, a CD is a smart way to earn even more on your tax windfall by locking in an interest rate for anywhere from three months to five years.
Generally, a CD should be fee-free and as easy to open as any checking or savings account. In addition to considering the interest rate, also look at minimum deposit requirements and penalties for early withdrawals, which are typically equal to the interest you've earned up to that point.
With that said, choose your term wisely. If you intend to spend the money at a specific point in the future, make sure your term is up before you need the cash.
3. IRA
If you're thinking long-term, consider putting your tax refund toward your retirement goal. If you have a retirement account through work that's funded with pre-tax contributions, you won't be able to add your refund to that account, but an IRA works just as well.
IRAs are tax-advantaged investment accounts that come in two varieties: traditional and Roth. The former allows you to deduct your contributions on your tax return until you reach a certain income level, while the latter is for after-tax contributions and tax-deferred growth. In 2020, you can contribute up to a total of $6,000 to a traditional IRA and Roth IRA, plus an extra $1,000 if you're over age 50.
One valuable benefit of an IRA is that you're able to fund your account for the previous year all the way up to the tax deadline. That means if you didn't max out your 2019 contribution limit, you can still put money in an IRA before April 1 and count it toward last year's limit, and then contribute an additional $6,000 for 2020.
4. Brokerage account
A brokerage account is a good way to level up your investments. If you make regular retirement contributions and the money you need for short-term goals is accessible in other accounts, you might consider investing your tax refund in the market.
The opportunity for growth in an investment account is far beyond a savings account. Plus, the money is generally more liquid than if it were tied up in a retirement account. Keep in mind that there will be an element of risk no matter what you invest in, but choosing the right allocation of stocks and bonds can help mitigate it.
- More tax day coverage:
- When are taxes due?
- How to file taxes for 2019
- Should I do my own taxes?
- Credit Karma vs. TurboTax
- Where is my tax refund?
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