Are you getting a tax refund this year?
Through the first week of April, most American taxpayers were owed a refund. Of the nearly 101 million tax returns filed, 80.2 million were due a tax refund averaging $2,851.
If you don’t yet have a plan for your refund, here are some suggestions:
Contribute to an Individual Retirement Account.
For most Americans, the Roth Individual Retirement Account will be the best IRA option. Unlike a traditional IRA, you won’t get an upfront tax deduction for your contribution, but you will not owe taxes when you withdraw from your Roth on the back end. In addition, all the money inside your Roth will grow tax-free.
The IRA itself is just a shell. Once you’ve opened the account, you will need to select the right investments to fill it. In most cases, low-cost mutual funds are an excellent choice.
For the 2017 tax year, Americans who are under 50 years of age can contribute up to $5,500. Older Americans can contribute up to $6,500.
Pay off your credit card balance.
While we’ve been in a low interest rate environment for many years, the interest rates for credit cards have remained stubbornly high. To reduce your credit card debt, pay down the highest interest rate card first while making at least minimum payments on any other cards.
Pay down your student loan.
The average student borrower now graduates from college with more than $37,000 in debt. There are a lot of reasons to pay down student debt, but here is one that is commonly overlooked. A study published in the journal Social Science and Medicine found that the more Americans borrowed for college, the worse psychological health they reported.
Contribute to a college fund.
If you have young children, now is the time to contribute to a college savings account. Don’t be one of those parents who is so scared by the cost of college that they figure it’s pointless to save.
In reality, most families do not pay full price. In fact, 58% of students at public universities receive institutional scholarships and/or grants and a whopping 88% of students who attend private colleges also receive some financial assistance.
An easy way to save for college is through a 529 college savings plan. Most states give parents a tax deduction for contributing to the in-state plan, but the tax benefit isn’t always enough to compensate for an expensive, poorly performing 529 plan.
Look for a low-cost 529 plan that preferably offers low-cost index funds. You can learn about and compare different 529 options at SavingforCollege.com.
Consider changing your tax withholdings.
If you had an unusually large tax refund you might also want to consider reducing your tax withholding this year. Try using the tax withholding calculator on the Internal Revenue Service website.
To use the calculator, you will need to gather your most recent pay stubs and your most recent income tax return.
If you decide to change your withholdings, complete a new Form W-4, Employee’s Withholding Allowance Certificate.