Tax refunds: eight ideas on what to do with them

It’s that time of year, and hopefully the tax fairy is giving you a nice refund instead of asking for more of your money.
by David Riedel

It’s that time of year, and hopefully the tax fairy is giving you a nice refund instead of asking for more of your money. So let’s assume you’re getting a decent refund. There are many ways to use the money, some frugal, some not. Here are several:

  • Apply the refund to next year’s taxes – This option doesn’t sound so attractive up front, but I always, whether I expect a refund or not, operate from the mindset that I’m not getting one. That way everything I do receive is a nice surprise. And for freelancers (like my wife and me), our income changes from year to year and knowing there’s money waiting to be used for the following year helps ease some financial anxiety.
  • Stick the money in a savings account – I have a friend who’s been doing this since he got his first job at 15; he’s now 43. He’s counting on the money to be a retirement nest egg. He’s also one of the rare people I know who has only owed additional tax a handful of times, so his savings account has grown to a nice size. In case you’re wondering, he also has a 401(k) and an IRA.
  • Open an IRA – Roth or traditional? That’s up to you (and they have different rules and limitations, so talk to your financial planner), but it never hurts to have a cushion for retirement aside from your 401(k), pension, or savings account. And if you already have an IRA, in 2019 you can contribute $6000 per year instead of $5500.
  • Buy scratch tickets – I mean, you could do this. But don’t.
  • Spend the money on your children (if you have them) – And I don’t mean buy them ice cream each day for the next year. I mean consider opening a 529 for their college funds, or help them open their own savings accounts (especially if they’re young and learning how many works).
  • Pay off some debts – I’m of the mind that it’s better to have less debt than more debt. Some people disagree with me. I know a couple who literally had “Live Rich, Die Poor” cocktail napkins made. And they mean it.
  • Make home improvements – It’s not as sexy as buying a new car, but chances are your kitchen (or bathroom or heating system) needs an upgrade more than your modes of personal transportation do.
  • Go on vacation – I don’t know about you, but 2018 was a loooooong year. Go somewhere warm (assuming you don’t already live in Phoenix or Miami) and live it up for a week. Everyone needs a break.