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You may not know it yet, but a very large majority of us are going to get nice tax refunds this year thanks to tax law changes last year. Maybe you saw it coming and already adjusted your withholding, but odds are 99% of us didn’t. I want to encourage you to not think of this as an instant trip to Disney World, but instead use it wisely so it will pay off even more in the future.
First before we go any further head over and use the IRS withholding Calculator so you can adjust your withholding for 2019. There is no need to let the IRS be a savings account for you all year, while a refund is nice they don’t pay interest! The goal should be almost no tax refund back.
Now, what to do with the money you overpaid in 2019!
5 Ways to Save Your Tax Refund
Online Savings or Money Market Accounts
While having a local bank is great, you should consider putting any extra amounts of money into online banks. They are paying up to 1.75% interest right now compared to most local banks that pay maybe .35-.45%. The difference in real money… On $2,000 your yearly interest would be $35 compared tothe local bank giving you $7.
CD Accounts
CD accounts are a type of savings account that you aren’t allowed to touch for a set period of time. Current interest rates for a $2,000 CD are up to 3.75% (best is at Navy Federal right now) and most are 12 month or 24 month CDs. Over 1 year that would earn you $69 back in interest. See current rates at other banks.
Note: If you don’t already have an emergency savings account and have a high chance of needing this money, you don’t want to go with a CD. The fee for touching it early will outweigh any earnings.
Health Savings Accounts
For folks with a high deductible insurance plan (you don’t pay co-pays but have everything apply to a deductible) then you should also have a health savings cccount. This is a pre-tax savings account that you can put money into. That means it lowers your total income and you don’t owe any tax on the amount in the account. Depending on your insurance deductible, you can put up to $6500 a year in this account. It’s okay to only partially fund it if you don’t have that much.
Even though you are putting your tax refund in, you’ll still get to take that off your income taxes next year! That’s a double win!
Note: These accounts can be invested in the stock market and make a good chunk in earnings. The money comes out tax free as well, so put your account to work and not just choose a basic 1% interest version. We use Health Equity for ours.
Put it Towards Your Mortgage
If you’ve got a rainy day fund and extra savings, then take your refund and put it towards your home loan. A one-time extra payment goes straight to your principal and will save you a huge chunk of interest over the life of the loan!
Let’s assume you have a $150,000 mortgage at 4% interest rate. Your monthly payment is around $700 a month. Did you know for the first few years of the mortgage only $250-$300 of your $700 payment actually goes towards the amount you owe? The rest just pays interest.
Putting $3,000 towards your mortgage principal would be like paying 2 years of principal payments all at once! Not only did you reduce the life of your loan by two years; you’re also going save the interest payments on that amount for the rest of the mortgage. Head here to calculate exactly what the savings would be for your mortgage.
Save it for Retirement
Consider putting your refund into an IRA. Not only will this earn interest much higher than a local savings account, but depending on the type of IRA you pick it can even make you owe less taxes next year!
For example, if a person with $65,000 in income got back a $3,000 refund this year and immediately went out and put it in a traditional IRA, it could lower next years taxes by $400! Not to mention all the interest it would earn this year. The $400 tax savings is already like earning 10% interest, and the markets are currently earning around 10% interest, so you see where this is going.
Anyone less than 50 years old can put in $6,000 into an IRA every year. You can still put money into an IRA even if you take part in a 401K at work! If you want an idea of where to open the account I personally would go with Vanguard. They have the lowest fees and make it very easy.
If you got a much bigger refund than you thought, then you may want to learn how NOT to use your taxes as a savings account.
