By Bennett C. Whitlock III
Private Wealth Advisor
The average refund in 2022 (for the 2021 tax year) was $3,176 for individual income taxpayers, according to the IRS.1
If you received a refund in 2023 after filing your 2022 tax return, will you save or spend it? While you may be tempted to indulge, consider using the money to solidify your long-term financial position.
For people starting out in their careers:
- Add to your emergency fund. Consider saving enough to have the equivalent of at least three-to-six months’ worth of income in an emergency fund.
- Pay off student loans. If you are carrying college debt or other loans, applying your refund to the balance can help reduce the total interest you pay or eliminate the debt entirely.
- Invest in an IRA. Think about starting a habit of investing your tax refund each year into an IRA, where any earnings can accumulate on a tax-deferred basis. While you are limited to contributing $6,500 annually ($7,500 for those age 50 and older), the savings can add up. For example, investing a $3,000 refund each year from age 26 to 65 earning seven percent annually would build to more than
$640,000.
For those starting families:
- Save for a down payment on a home. A tax refund can make a meaningful impact as you accumulate enough to purchase your first home. Consider saving enough to cover at least 20% of the home’s value. Doing so will eliminate the need for private mortgage insurance, which will cost you extra in interest payments.
- Start or add to a college fund for your children. With the cost of higher education continuing to rise, starting early and saving often can help you make funding tuition a reality.
- Invest your refund. Consider adding your refund to your portfolio, using it to accelerate progress toward your long-term goals.
For those who have a solid financial foundation:
- Apply to home improvements. If you are planning to remodel your home, you may want to use the money to fund specific upgrades, or to keep as a contingency fund throughout the project.
- Save for starting a new business. If you want to start your own business now or in retirement, the refund can provide a cash buffer to help you get started. It can either replace some of your regular income or be used to fund expenditures required to get the business up-and-running.
For those approaching retirement:
- Increase your retirement savings. As your retirement date and goals get clearer, maximizing your retirement savings should take priority. Your refund can help you make an additional investment towards your financial future. If you are 50 or older and have earned income, current tax laws allow you to invest extra dollars in your IRA and workplace retirement plan.
- Pay down your mortgage. Consider using your refund to make an additional principal payment to your home mortgage. Erasing debt prior to retirement can minimize a major financial burden.
For retirees:
- Spend it on your retirement dream. If you plan to travel or pursue a hobby in retirement, use the refund as a trigger to make it happen. Allow yourself to spend the money without guilt — after all, you’ve earned and planned for this opportunity.
- Invest in a Roth IRA. If you have any earned income that allows you to make retirement contributions, your tax refund can likely be placed into a Roth IRA. This vehicle provides potential tax-free growth of any earnings.
- Pay health care expenses. Today’s rising health care costs are often one of the biggest expenses for retirees. Consider applying the funds to Medicare or long-term care policy premiums.
Review your tax withholding
If you regularly receive a large tax refund, you may want to adjust the withholding on your paycheck. Decreasing your refund may increase your monthly net pay, allowing you to allocate extra income each month to your financial goals.
Consult with your tax professional and financial advisor before making adjustments or deciding how to manage your refund.
Bennett C. Whitlock III, CRPC®, is a Private Wealth Advisor and CEO with Whitlock Wealth Management, a private wealth advisory practice with Ameriprise Financial Services, LLC. He specializes in fee-based financial planning and asset management strategies and has been in practice for 28 years. To contact him visit whitlockwealth.com, call 877-WHITLOCK or email whitlockwealthmanagement@ampf.com. Offices are located at 12848 Harbor Dr, Ste 101, Lake Ridge, VA 22192 and in Downtown Historic Manassas at 9073 Center Street, Manassas VA 20110.
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1 – IRS.gov, “Filing Season Statistics for Week Ending October 28, 2022,” Nov. 03, 2022. irs.gov/newsroom/filing-season-statistics-for-week-endingoctober-28-2022
