What to do With Your Tax Refund

Feb 2023

Tax season is here! The IRS recently reported that the average refund for 2023 is $2,232. If you are expecting a refund, it can be easy to fall into temptation and spend the money on something luxurious or frivolous. However, the smarter move is to consider your financial future and think of ways to improve your situation. A tax refund is likely the largest windfall you receive all year, so it is important to spend the money wisely.

If you are receiving a tax refund this season, there are many financially smart options to consider. Here’s some of our suggestions.

 Short Term Solutions

  1. Pay off Debt: Living with high interest credit card debt can sometimes feel like you’re spinning your wheels and not really getting anywhere. In order to make a substantial difference on your debt, you need to pay more than the minimum required amount. The same strategy also applies to student loans. Allocating your tax refund to this debt can help make a dent in your premium and move you towards a life of living debt-free.
  2. Enhance Your Emergency Savings Fund: Emergency savings are critical because without it, you’re likely to take on high-interest credit card debt to cover an unexpected expense. We typically suggest clients have 3-6 months of living expenses available should an emergency happen.
  3. Contribute to Your HSA: If you are eligible, consider contributing to an HSA plan to reduce your taxable income and cover medical / other qualified expenses. The HSA contribution limits for 2023 are $3,850 for self-only coverage and $7,750 for family coverage. Those 55 and older can contribute an additional $1,000 as a catch-up contribution.
  4. Invest: Add the money to a brokerage account so the money can grow in the market and be accessible to you before retirement.

 Long Term Options

  1. Build Your Retirement Nest Egg: Your future-self will be grateful you saved the tax refund for your retirement. Some contributions even have tax incentives. You can save for your retirement a few ways:
    • Increase your 401(k) contributions so that you reach the maximum contribution, $22,500 (2023 max). If you’re age 50 or older, you’re eligible for an additional $7,500 in catch-up contributions, raising your employee contribution limit to $30,000.
    • Make an IRA (or Roth IRA contribution). You can contribute $6,500 in 2023. If you are 50+, you can contribute $7,500.
  2. Save for College: 529 plans have tons of benefits – the money grows tax free; money can be used for a variety of purposes (room and board, tuition, books, vocational programs, technical schools, etc.) and the state of Michigan even offers a tax incentive. 529 plans can be set up in 5 minutes at misaves.com with as little as $25.
  3. Purchase I Bonds: Elect to receive your refund as paper U.S. Series I bonds (currently paying 6.89%). You can elect this right on your tax return for up to $5,000. This is in addition to the $10,000 per year maximum any individual can buy online at treasurydirect.gov.

 Invest in Yourself

  1. Find a class that excites you – could be at a local university, at the gym, or an art studio. Explore your passions!
  2. Plan a trip to a destination you’ve been thinking of.
  3. Address some home improvements that you’ve been putting off, especially if putting it off might risk the problem ballooning into a larger problem down the road.
  4. Think of something that will improve your life but that you previously put on hold. If your tax refund can make it possible, go do it!

Keep in mind that the IRS allows taxpayers to split their refund across three accounts via direct deposit. This provides a great opportunity to allocate the funds before it hits your bank account to assure the money is spent in the way you intended.

Make your tax refund count! This is a big opportunity to do something meaningful for your financial future.

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