Nearly eight in 10 tax filers have qualified for refunds over the past few years and according to Bankrate.com, the overall average refund check is about $2,900. That’s enough cash to make a decent dent in your retirement income planning strategy.
Here are some ways you can put your tax refunds to good use while you’re still earning a paycheck:
- Retire your credit card debt. The math is simple: Paying off a card balance with an 18% interest rate is like earning an 18% investment return. That’s pretty good in today’s investing environment. For more financial flexibility when you retire, retire the credit cards too, or resolve to never carry a balance.
- Replenish your emergency cash fund. When the paychecks stop and you have to rely on savings and pension payments for income, that rainy day cash fund (you do have one, right?) can help you cover unexpected expenses without having to raid your tax-deferred savings accounts or un-retire those credit cards. Use your refund to rebuild your existing fund or start a new one. Be sure to put it in a liquid account you can easily access without penalty.
- Add to your retirement savings. If you don’t have credit card debt, and you’ve got your emergency fund in place, contributing to your workplace retirement plan or IRA is a good way to grow your refund. A well-thought-out retirement income withdrawal strategy should allow you to keep most of your retirement plan savings growing for a long time. And that money grows tax-deferred until you withdraw it.
- Protect your home. If you own your home, purchasing a home warranty can save you thousands in repair bills. Just a few claims for annoyances like a broken dishwasher and electrical or plumbing repairs will more than pay for the insurance premiums.
- Be charitable. Help out your grown kids with a loan or gift, or provide a “match” to a grandchild to build good savings habits. Donating to your favorite charity can make you feel good and may also offer a tax deduction, to help your money go further in retirement.
- Fund a special goal. Retirement gives you more time to have fun, so set aside your refund towards that trip you’ve always wanted to take or to purchase supplies for the home-based craft business you’ve been dreaming about. When you put money in a special fund, you’re more likely to keep it earmarked just for that goal.