Use Your Tax Refund to Kick-start Savings

Set aside that tax refund to contribute to retirement, save for college or make a larger splurge down the line.

By: Navy Federal on March 17, 2016

Each year, almost 80 percent of taxpayers receive a tax refund, at an average of $2,800, according to the IRS. These refunds might seem like a free gift from the government, but remember–it was your money to begin with. It’s tempting to treat this windfall like a mini-lottery win and go on a splurge, but there may be better ways to use this “extra” cash:

Pay off debt. Debts from credit cards and loans put stress on your wallet, so why not lighten the load? You might even be able to make a dent in a high-interest card that has been a monthly expense. You can then divert those payments to your savings account and pay yourself.

Start or strengthen an emergency fund. It’s hard to know when you may suffer a job loss, medical emergency, sudden home repairs or other issues, but you can prepare financially. Give yourself a safety net by investing your refund toward starting or growing your emergency fund. This money should stay fairly liquid, so save it in a standard savings or money market account.

Contribute to retirement savings. Let your refund grow tax-free or tax-deferred by putting it into an IRA. In 2016, you can contribute up to $5,500 or up to $6,500 if you’re 50 or older. Don’t have an IRA yet? It’s a great investment toward a comfortable retirement.

Save for college, tax free. Contributing your refund to a 529 plan is an investment in a child’s future…that is free from federal taxes! There are no income limits or age limits, and annual contribution limits can be as high as $380,000, depending on your state.

Save toward a home. If you don’t own a home but are looking to buy one, this is your opportunity to save toward that goal. Open a separate savings account and start putting aside money for a down payment.

Start a short-term savings account. If you intend to splurge the money, but need to amass a few more refunds or windfalls to hit your goal, store it in a short-term savings account like Navy Federal's SaveFirst Account. With the money tucked away in a savings account, you can keep it safe from temptation! Saving and investing money may not have the same immediate appeal as a big splurge, but if you build a solid financial foundation now, you can afford to splurge more later. Not to mention that a little extra money acts as nice security and mental relief.