Money Smarts Blog
What To Do With Your Tax Refund
Feb 8, 2024 || Jim O’Leary, Financial Coach
Stop me if you’ve heard this one …
Person: “What’s up?”
Me: “My tax bill and all the stress that goes with it.”
OK, OK, groan all you want — but that dad joke is painfully relatable for the 72% of adults who stress about money, according to the American Psychological Association. With tax season upon us, you might be stressing about whether you’ll be getting a refund this year, or what to do with it if you're expecting a check from Uncle Sam.
Save yourself a little stress and follow our tips on making that extra cash work for you.
1. Clear debt with a Share Pledge loan
This is a powerful tool that packs a one-two punch. Not only are you building credit as you pay off your debt, you’re also building a nest egg for the future.
Here’s how it works:
Let’s say you get a $3,000 tax refund. With a Share Pledge loan, you may receive a $3,000 loan using your own refund money as collateral. The interest you earn from your initial deposit can help offset some of the interest you’re paying when borrowing from the Share Pledge loan.
You can use the loan to pay down any outstanding debt (or use it on a house or whatever your situation dictates) then the credit union will release your funds back to you once your loan is paid back. This method’s worked for all three of my grown children, so I definitely recommend it for those who would benefit from it.
IHMVCU offers share pledge loans and has helped many members establish credit through them. Stop by any branch or chat with us today to discuss this option.
2. Meet your match (your company’s match, that is)
No matter what, try to put the amount that your company will match into your 401(k) — otherwise, you’re just leaving money on the table. That little extra boost (limits for the 2024 tax year: not to exceed $23,000 for those younger than 50, or $30,500 for those 50 and older) can put you on the path to healthier retirement savings. Time is your friend when you're saving money!
3. Increase your tax refund for next year
I know, I told you to stress less and here I’m telling you to think about next year, but hear me out. Based on the 2023 tax table, you can get $11 back per $50 contributed to your IRA if you’re a single or married filing separately, or $6 back per $50 IRA contribution if you’re married filing jointly or head of a household.
Increasing your IRA contributions will not only have a big impact on your account performance in the future, but you’ll also reap the rewards in the form of a tax refund as soon as next year. For 2023, the maximum IRA contribution is $6,500, but you can add another $1,000 catch-up contribution if you’re 50 years or older. For 2024, the limits increase to $7,000 and still include the $1,000 catch-up contribution. Remember., the limits are a combined for both Roth and Traditional IRAs.
Bonus: You can still increase your 2023 tax return with a Traditional IRA or HSA contribution for 2023 tax year. You have until April 15, 2024, to contribute for the 2023 tax year. Just make sure to play the game by the rules the IRS has set.
4. Start early
Since I was 18 years old and filing taxes on my own, I’ve made sure to lower my taxable income by contributing a certain amount to my IRA (see tip #3). This is something I’ve encouraged my own kids to do too. As a teenager, you don’t notice $5-$10 taken out of each paycheck and put into savings — but starting early gives you plenty of years to grow. Roth IRAs are great for kids working but still being claimed on their parent's taxes.