Americans receive an average tax refund of $3,109. According to the IRS, as of March 15th.
Business Insider spoke to Grant Kneeland, a certified financial planner and wealth advisor at Carson Wealth, about what to do if you receive a refund.
First, if the IRS sends you a large check, it could mean that you are having too much tax withheld from your paycheck and are essentially giving the government an interest-free loan. there is.
“Typically, the goal is to get it as close to zero as possible, which means minimal refunds or minimal tax payments. That shows your withholding is correct,” Neeland said, adding that new Give your employer your W-4, adding that they can adjust the withholding by submitting the form. “This shows that we are not making large interest-free loans to the IRS and that you are living within your means.”
If you end up receiving a refund, try not to do so right away.
“This is an irreversible decision. You can't get that money back,” Neeland said. However, if you manage wisely, you can quickly achieve some of your financial goals and set yourself up to build long-term wealth.
Where you can save money now: High Yield Accounts or Money Market Accounts
Once you receive your refund, the first step is to transfer the money from your checking account to your savings account. This has two effects on him. One, it saves you from spending money too quickly, and two, it buys you time to think about what to do with that money.
“One of the things I always encourage families to do is put it into savings and wait,” Neeland said. “If you take your time with your decisions instead of reacting too quickly, you may avoid making decisions you'll regret.”
Grant Kneeland, wealth advisor at Carson Wealth, says: carson wells
As for where to move funds, he said, “With interest rates as favorable as they are now, high-interest savings accounts and the money market may be where funds go for now.” Currently, both types of accounts can yield more than 5% per year. Moreover, both are liquids.
There are some important differences. Money market accounts give you easy access to cash by allowing you to write checks and use debit cards linked directly to your account. High-yield accounts (usually online) require you to transfer cash to your checking account to use it. This process may take 1-3 business days. Note that money market accounts typically have higher minimum balance requirements, ranging from a few hundred dollars to a few thousand dollars. High-yield accounts typically have no (or low) minimum balance requirements.
Although interest rates are expected to fall in 2024, you can earn more with these accounts than traditional savings accounts, which typically offer interest rates of less than 0.5%.
Where to invest your money now: Start with a tax-deferred retirement account
Before you invest your tax refund, there are two financially important tasks to complete. That means building an emergency fund (Nieland recommends saving six months' worth of living expenses) and paying off high-interest debt.
If you need to accomplish any of these items, use a refund to speed up the process. If you have a rainy day fund and no high-interest debt, you can start considering a lump sum investment.
Neeland said you should start with a tax-deferred retirement account. These are accounts like 401(k)s and IRAs where he doesn't pay taxes until he withdraws. Are you contributing to your 401(k)? Are you making the most of it? If so, move it to an IRA. Or, if you're eligible, start investing tax-free for your future by contributing to a Roth IRA.
Other tax-efficient and smart accounts to invest in include 529 plans for saving for education expenses and Health Savings Accounts (HSAs), which are the only accounts that offer 3x tax benefits.
Next, you can consider investing in taxable brokerage accounts, which don't have the same tax benefits as 401(k)s, IRAs, 529s, and HSAs.
When investing your tax refund, Neeland advised paying less attention to market volatility and more attention to your time horizon. “If they need this money in the short term, I look at higher amounts.” – If you need an interest savings account as “tomorrow's money”, you can take a little more risk. can. If he doesn't plan on using this money in 10, 15, 20 years, then he can be more growth-oriented and not have to worry about short-term volatility. ”
After all, “time in the market is more important than market timing.”
