How to Put Your Tax Refund Toward Retirement
How to Put Your Tax Refund Toward Retirement
If you’re receiving a tax refund this year, cut the temptation for a spending spree and use that money in a way to help grow your nest egg for future years. It might not seem as glamorous as, say, splurging on an exotic getaway, but focusing on long-term strategies will prove more fulfilling in the long run. There are several ways to put your tax refund toward retirement.
Pay off Debt
If you’re carrying debt you’re wasting money on interest payments. By eliminating debt, you can put the money you normally put toward a monthly credit card payment toward retirement savings instead.
Create an Emergency Fund
What’s your plan for a fender bender? An emergency vet visit? A basement flood? You need a dedicated savings account with quick access to cash for emergencies and unexpected expenses so you don’t fall back into debt.
Cushion Your Health Savings Account
Money in a health savings account can accumulate interest over time, and if used for medical purposes, the funds won’t be taxed. When tax season rolls around again, the funds put into the account can be deducted from your income. The contribution limit for 2019 is $3,500 for individuals and $7,000 for families with a high-deductible health plan.
Fund an IRA
There are two principal types of IRAs: traditional IRAs and Roth IRAs. A traditional IRA will allow you to deduct contributions from your income at tax time, but any funds you withdraw will be taxed. With a Roth IRA you won’t be able to deduct contributions from your income at tax time, but you can make withdrawals tax-free. Generally, if you think you’ll fall into a higher tax bracket in the future, it makes more sense to use a Roth IRA. If you’re 49 years old or younger, you can contribute up to $6,000 in either a traditional IRA or a Roth IRA. For those 50 and older, the limit is $7,000.
Review Your 401(k)
If your company offers an employer-sponsored retirement plan with company matches, such as a 401(k), try to contribute as much as possible, preferably up to the company match, in order to maximize your retirement savings efforts.
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