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As of March 24, the Internal Revenue Service (IRS) had issued more than 59 million tax refunds, with an average refund amount of $2,903. That’s down about 11 percent from last year’s average refund of $3,263, but it’s still a large enough amount for most taxpayers to find a productive use.
Using a refund in this range wisely may be enough to start a savings plan or help someone save thousands of dollars in interest on debt, but only if the money is spent wisely on bills before it is wasted or spent on groceries and regularly.
If you’re looking for a way to use your tax refund for maximum impact, here are some of the best options to consider in 2023 and beyond.
With interest rates rising throughout 2022 and 2023, credit card debt and other variable debt is now more costly than it has been in years past. For example, recent statistics from the Federal Reserve show that the average credit card interest rate on the accounts it evaluates was 20.40% at the time of last calculation, compared to 16.45% for all of 2021 and 16.28% for 2020.
If your credit card debt is in this range or anywhere close, using your tax refund to pay it off or pay it off completely can allow you to reduce your bills and interest charges. For example, if you have a credit card balance of $3,000, an interest rate of 20.40%, and a minimum monthly payment of $60, you will need to make 113 monthly payments, and incur $3,752 in interest charges along the way.
In addition to credit cards, you may want to get ahead with high-interest car loans, personal loans, or any other outstanding debt with high interest rates. Doing so can put you in a better position financially, and your future self will thank you.
If you can’t pay off all of your credit card debt at once, you can use your tax refund to pay some of it. Then, you might consider opening a balance transfer credit card to refinance the remainder with a promotional 0% interest rate. Cards like the Citi® Diamond Preferred® Card offer an introductory 0% APR for 21 months on balance transfers (17.74% to 28.49% variable APR after that).
While rising interest rates can make carrying debt more expensive, they can also help you grow your savings. The truth is, a range of high-yield savings accounts and certificates of deposit (CDs) are currently offering pretty good rates with no fees.
For example, you can now get a 10-month CD with 5.05% APR on Marcus at Goldman Sachs as long as you have at least $500 to put aside. Plus, many of the best high-yield savings accounts offer high interest rates, such as the CIT Bank Savings Connect account, which currently offers 4.5% APR on deposits.
Maybe you’re happy with your debt levels and short-term savings, but you want to retire early. If you meet the eligibility requirements, you can always increase the percentage of your contribution to a workplace retirement account, or contribute to a Traditional IRA or Roth IRA.
Through 2023, most people can contribute up to $6,500 across all IRA accounts. The exception is those 50 and older, who can contribute an additional $1,000 this year, up to a maximum of $7,500.
Keep in mind that income limits who can contribute directly to a Roth IRA, so if you’re married and earn more than $214,000, you may not be able to do so. If you’re married and filing jointly from $204,000 to less than $214,000, you could also be stuck with a reduced contribution amount. Additional income caps and phase-out periods apply to single filers, heads of household, and eligible widows.
While anyone with an income can contribute to a traditional IRA, contributions from those who meet certain criteria and/or income requirements are tax-deductible.
With Biden’s student loan forgiveness plan still up in the air, it doesn’t hurt to start saving for college now if you have the means.
Many states offer tax benefits for 529 college savings plans, and the money can be invested in a foundation fund to grow and compound over time. As an example of a tax benefit, Indiana offers a 20% tax credit on the first $7,500 you contribute to a 529 plan in 2023.
If you’re worried about college overfunding, you should know that the SAFE Act 2.0 has some built-in relief here, starting in 2024. Specifically, people who have had a 529 plan open for at least 15 years will be able to move up to $35,000 in unused 529 college savings plan funds to create a Roth IRA for beneficiaries (subject to annual contribution limits).
Buying life insurance is an easy thing to put off, but it can easily cost less than the monthly cost of eating out. With your tax refund funds safely deposited into your account, it definitely makes sense to purchase insurance for yourself and your spouse, “just in case.”
For example, a company called Bestow lets you buy cheap term insurance to protect your family, possibly without a medical exam. Coverage amounts range from $100,000 to $1.5 million, and you can apply if you are between the ages of 18 and 60. Best of all, Bestow’s term life insurance rates start at $11 per month.
Buy term life insurance with Money.com and get savings from multiple insurance companies at once.
Investing in yourself can vary depending on your goals, and you can choose to focus on your professional life or focus on something else entirely. For example, the average tax rebate may be enough to pay for several years of gym memberships, or even a home gym, so you can finally look your best. You could even invest in a new wardrobe or that dental job you’ve put off for a few years.
On the professional side, you can pay to attend planning groups, certificate programs, or other forms of formal education. The average cost of one year of community college is likely not much higher than the average rebate for in-district tuition of $3,860 for the 2022-2023 school year, so that’s an option.
While your tax refund is really just money you overpaid the government, there’s nothing wrong with saving some of it for things you really want. Maybe it’s the vacation you’ve desperately needed over the past few years, or maybe it’s a new mattress, home decor, or a new laptop for the kids.
Ideally, you can spend Some Or your tax refund can help you get ahead while also saving some cash for purchases or experiences that make you happy. As they say, “everything in moderation”, life is more important than taxes and bills anyway.
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