Will 2021 be the year you save your tax refund for an emergency, or will you spend every last penny like the majority of Americans do? The Internal Revenue Service will let you directly deposit your refund money into three different types of accounts. You can have part of the refund sent to your checking account, another amount directed to your savings account, and the third chunk of cash sent straight into your Individual Retirement Account (IRA). You can also use up to $5,000 of the refund to purchase savings bonds.
This is an effortless way to help you save that money this year instead of spending it. You can still choose to have your entire refund sent into just one account if you would like. Even if this is your first year to have your refund sent electronically to a bank account, the directions are easy and clear. Form 8888 includes a blank check diagram showing you exactly what to look for and enter.
Here are some ideas on what you could do with your refund:
- Emergency fund – If you already have an emergency fund, you could always add to it. If you don’t have one, then it’s a good idea to take your refund and start one. You never know when something will come up (like a global pandemic), and you’ll need a nice bit of cash to take care of it. Consider opening a high-yield savings account and depositing your refund for an unforeseen future expense.
- Retirement fund – Direct deposit your refund into your Roth, Traditional, or SEP-IRA. With the price of everything going up recently, you may need more money than you think to retire comfortably. Start now but adding that refund to your retirement fund, so you can live well when it’s time to stop working.
- Pay down your debt – If you have medical bills, credit cards, an auto loan, or student loans, you need to get that debt monkey off your back. Add the refund to either your high-interest accounts or payoff a smaller account. Either way, making more than the minimum payment will help you pay off your debt more quickly.
- Invest in stocks, bonds, or an ESA – While investing can sometimes be risky and not many people want to take those risks, there are some stable and beneficial things to invest in. Start a college fund for your children. Look into opening an Education Savings Account (ESA) or a 529 College Savings Plan with your local Credit Union. It’s never too early to start thinking about their future.
- Support a charity – Find a charity that speaks to you. Are you an animal advocate, environmentally friendly person, or all about helping kids? Not only does making a charitable contribution help a worthy cause, but it’s also tax-deductible. It’s a win-win! We suggest this only after taking care of the other things mentioned above.
Whether you choose to save, spend, invest, or donate, it’s your hard-earned money, so make the most of it. If you choose to just spend the money, try to spend it wisely. Do you need a new water heater or a new furnace? Is your car on its last leg and about to give out? It’s a good idea to take a look at things that need replaced or fixed now, so they don’t end up costing you more money later on down the road.
If you would like more information about paying down your debt, contact us today. Our certified credit counselors can help you with your budget and with setting up a debt management plan. It’s a smart choice to use that refund to help you get rid of that debt once and for all.