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As of March 24, Internal Revenue Service (IRS) issued over 59 million tax refunds with an average refund of $2,903. That’s about 11% less than last year, when the average tax refund was $3,263, but still big enough for most taxpayers to put to good use.
A return in this range, used wisely, could be enough to kick-start a savings plan or help someone save thousands of dollars in interest payments on a debt, but that’s only if the money is used wisely before it’s squandered. trifles or spent on groceries and regular expenses. accounts.
If you’re looking to make the most of your tax refund, here are some of the best options to consider in 2023 and beyond.
As interest rates rise throughout 2022 and 2023, credit card debt and other variable debt are now costing more than they have in the past few years. For example, latest statistics from the Fed showed that the average credit card interest rate on the accounts it assessed was 20.40% at last count, compared to 16.45% during 2021 and 16.28% in 2020.
If you have credit card debt at rates in or near this range, using your tax refund to pay it off or pay it off in full could result in fewer bills and lower interest payments. For example, a credit card balance of $3,000 at 20.40% with a minimum monthly payment of $60 would require payments over 113 months with interest payments of $3,752.
Besides credit cards, you can make progress on high-interest auto loans, personal loans, or any other high-interest outstanding debt. This can improve your financial situation and your future self will thank you.
If you can’t pay off all of your credit card debt at once, you can use a tax refund to cover some of it. You can then consider opening a balance transfer credit card to refinance the balance at a promotional 0% interest rate. cards like Citi® Diamond Preferred® Card offer an initial 0% interest rate for 21 months (from 17.74% to 28.49% floating rate later) on balance transfers.
While rising interest rates can make debt service costly, it can also help you increase your savings. The thing is, a number of high yield savings accounts and certificates of deposit (CDs) are offering pretty good rates right now without any fees.
For example, you can get a 10-month CD right now through Goldman Sachs’ Marcus at a 5.05% annual interest rate if you have at least $500. In addition, many of the best high yield savings accounts also offer high interest rates. CIT Bank Savings Connect an account that currently offers 4.5% APR on deposits.
You may be happy with your debt levels and short-term savings, but want to retire. You can always increase the percentage you contribute to a workplace retirement account or contribute to a traditional or Roth IRA if you meet the eligibility requirements.
In 2023, most people can contribute up to $6,500 to all IRA accounts. The exception is for people aged 50 and over, who can contribute an additional $1,000 this year, up to a maximum of $7,500.
Just remember that income limits limit who can directly contribute to a Roth IRA, so you may not be allowed to do so if you are married and file a joint return with more than $214,000 in income. You may also face a reduction if you are married and file a joint return with income between $204,000 and less than $214,000. Other income limits and phase-out periods apply to solo applicants, heads of households, and eligible widowers.
And while anyone with earned income can contribute to a traditional IRA, contributions are only tax-deductible for people who meet certain income criteria and/or requirements.
With Biden’s plan to write off student loans still up in the air, it never hurts to start saving for college now if you have the funds.
Many states offer tax credits for contributing to a 529 college savings plan, and it is possible to invest money in basic funds so that they can grow and accumulate over time. As an example of tax credits, the state of Indiana offers a 20% tax credit on the first $7,500 you contribute to the 529 plan in 2023.
If you’re worried about overfunding your college education, know that Security Act 2.0 has some built-in easing starting in 2024. Specifically, people with a 529 plan open for at least 15 years will be able to transfer up to $35,000. in unused 529 Roth IRA college savings plan funds for the beneficiary (subject to annual contribution limits).
It’s easy to put off buying life insurance, but it can cost you less than what you’d pay for dinner at a restaurant each month. When your tax refund money is safe in your account, it definitely makes sense to evaluate insurance coverage for yourself and your spouse “just in case.”
For example, Bestow allows you to purchase an inexpensive insurance policy to protect your family without the need for any medical examinations. Coverage is available from $100,000 to $1.5 million and you can apply if you are between 18 and 60 years old. Best of all, Bestow’s term life insurance rates start at just $11 per month.
Buy term life insurance and receive offers from multiple insurers at the same time with Money.com.
Investing in yourself can look different depending on your goals, and you can focus on your professional life or something else. For example, an average tax refund might be enough for a few years of a gym membership or even a home gym membership so you can finally get into great shape. You can even invest in a new wardrobe or dental care that you’ve been putting off for years.
From a professional standpoint, you can spend money on membership in an inspiration group, certification program, or other formal education. The average cost of a single year of tuition at a community college is unlikely to be much higher than the average $3,860 tuition refund for the district in the 2022-2023 school year, so this is also an option.
While your tax refund is really just your money that you overpaid to the government, there’s nothing wrong with saving some of it for something you really want. Maybe this is the vacation you’ve been desperate for the last few years, or maybe a new mattress, home decor, or a new laptop for the kids.
Ideally you can spend some part of your tax refund for something that helps you move forward, and also reserve some money for a purchase or experience that makes you happy. “Everything in moderation,” as they say, and in any case, there is more to life than taxes and bills.
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