The IRS has issued more than 128 million income tax refunds for the 2020 reporting season, putting $355.3 billion in the hands of American consumers.1 For most recipients, such a sudden influx of money raises an important question: what is the best way to use money?
Last year, 27% of consumers said they planned to spend their refund on day-to-day expenses, while an equal number (8%) planned to “splurge” or take vacations.2 But what about your other options?
Although it’s tempting to spend their tax refund, most respondents said they plan to save their tax refund and/or pay down debt3. While debt reduction can be the cornerstone of an effective financial strategy, it’s essential to avoid making choices that might discourage you. long term return. For example, a home mortgage is often the largest debt taxpayers carry, and making additional mortgage payments can reduce your principal balance and shorten the term of the loan, allowing you to build equity faster.
However, using a refund to reduce mortgage debt sooner than expected could have counterproductive consequences, including losing the ability to claim the mortgage interest deduction when filing your income taxes. In addition, the reduction in your overall liquidity may limit your ability to make new purchases or investments that you had not planned.
With that in mind, it may be best to pay off higher-interest, non-deductible debts first, such as credit card bills and car loans. While this strategy may still limit your potential to seek other short-term financial opportunities, your long-term savings can be significant.
It may be prudent to use your refund to potentially bring your retirement goals closer to reality. IRA contributions (up to $6,000 in 2022; $7,000 if you’re 50 or older) may be deductible, depending on your income and the type of IRA you choose. The 2022 limit on 401(k) and 403(b) occupational retirement plan contributions is $20,500 ($27,000 if you’re 50 or older). If you’re not contributing the maximum yet, using this year’s refund to fund some common household expenses could help you allocate more of your income to a retirement account at work. As an additional potential benefit, the amount of any employer matching contribution may increase accordingly.
Of course, you may want to use this year’s refund for other purposes. Be sure to speak with your financial professional for advice on the best course of action. There is no guarantee that working with a financial professional will improve investment results.
1) Internal Revenue Service, 2021 2-3) National Retail Federation, 2021
Tim Bartholomew is an investment representative with Greene Investment Services located at the Bank of Greene County. Please call 518-943-2600 ext. 2153 with your comments or questions. Investment and insurance products and services are offered by INFINEX INVESTMENTS, INC. FINRA/SIPC member. Greene Investment Services is a trading name of Bank of Greene County. Infinix and Bank of Greene County are not affiliated. The products and services made available by Infinex are not insured by the FDIC or any other agency of the United States and are not deposits or obligations neither guaranteed nor insured by any bank or affiliated bank. These products are subject to investment risk, including possible loss of value. Prepared by Broadridge Advisor Solutions Copyright 2022.