If you’re expecting a tax refund this year, you might be dreaming of all the ways you can use the extra cash—but don’t be too quick to spend your return. After all, your tax refund isn’t just free money: It’s money you overpaid the government during the previous tax year.
Here are some of the best ways to “spend” your tax return. (Spoiler alert: You may not want to spend it at all!)
1. Pay off high-interest debt.
If you have credit card debt, student loans or unpaid medical bills, consider using your tax refund to pay down your debts. Start with the debts that carry the highest interest rate. That way, you’ll spend less on interest over time.
2. Put extra money away in a retirement account.
In addition to the contributions you make to an employer-sponsored retirement plan, you can also open an Individual Retirement Account (IRA) to save more toward your future.
Even if retirement is decades away, now is the time to plan: The more you save for retirement today, the more your investment will grow so that you have a healthy nest egg later on. When this year’s tax return arrives, set the money aside in a traditional or Roth IRA.
3. Contribute to your child’s 529 plan.
Use your tax refund to save for your child’s education by making a tax-deductible contribution to their 529 college savings account. If you haven’t started an account yet, it only takes a few minutes to open one online. In Wisconsin, you can open a 529 savings plan through Edvest or Tomorrow’s Scholar.
4. Top off your emergency fund.
The average American has about $5,000 in emergency savings, which may not be enough to cover even a month of expenses, depending on your lifestyle and family size. If your emergency savings account could use a boost, set aside your tax refund to save for a rainy day.
5. Indulge in a smart splurge.
Some people plan each year to use their tax returns toward a family vacation, a down payment on a new vehicle or another big-ticket purchase. “Fun money” is an important component of your overall financial health, so if your debt is manageable and your retirement savings are maxed out, it might make sense to use your return to treat yourself this year.
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