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Five Smart Ways to Maximize Your Tax Refund

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Larry Leet

Larry Leet

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Filing your tax return and getting a refund sometimes feel like an extra payday, but there are several things to think through before spending it frivolously.

Your income tax refund can be a good tool to help you get ahead and make progress toward your goals. If you have a refund, here’s how to keep it working for you.

Ramp up Retirement Savings

Adding to your retirement savings is an excellent way to make sure your refund keeps working for you. How can you use your refund to save for retirement?

Start with your 401k. Ask yourself,

  • Are you making the most of your company match?
  • Can you take advantage of catch-up contributions?
  • How can you intentionally increase your investments?

Your 401k provider most likely outlines a broad range of information and educational resources from investment ideas to risk tolerance assessments to rebalancing tips and more to help keep you on track to reach your goals.

This wealth of resources helps you determine the types of investments that are right for you. Use the information to your advantage. Your risk tolerance, time horizon, and goals, are all helpful when selecting the right funds for your needs. 

Your refund should simply be an avenue to continue your savings journey. Regular retirement contributions are critical to reaching your goals.

Look At Your HSA

A Health Savings Account is an incredible tax-advantaged investment vehicle for medical expenses. In 2021, individuals can contribute $3,600 and a couple can contribute $7,200 per year, and deduct the contributions from their taxable income. 

 Putting some of your refund toward your HSA can increase money available for health care expenses and reduce your taxable income.

 Also consider using your HSA as an additional retirement asset. You can do this by investing the balance of your HSA in an account designed for long-term assets. 

 If you are interested in maximizing the impact your HSA has on your retirement First Dakota Wealth & Trust has a solution to meet your needs. Contact us with your questions.

 Build Up Your Emergency Fund

A strong emergency fund brings several benefits like providing protection in the event of a job loss and limiting unnecessary debt to pay for ongoing expenses. Emergency funds should have anywhere from 3-6 months of living expenses to protect you and your family. 

Due to COVD-19, you may have tapped your emergency fund and that’s okay. The important thing is that you intentionally build it back up. 

First, set your goals. How much would you like to have in that account? You can use all or part of your refund to give the account a boost. If you still need more, automatically deposit funds from your paycheck into the account. 

Pro tip: Create a separate account from your everyday checking and savings accounts. That way, you’ll be less tempted to use the money for expenses outside the emergency scope. Your emergency fund should be highly liquid and safe, so it’s best to keep it invested in a money market account.

Save For Short-term Goals

When your emergency fund is fully funded, other short-term goals can be considered. Depending on the size of your refund, you may be able to make significant progress toward these goals like debt repayment, home remodels, or vacation. 

Much like your emergency fund, the money you plan to use for achieving short-term goals should be invested in time-appropriate investments. For example, if you are saving for a remodel in 5 years, invest in a CD that matures shortly before you need the money. It’s important to consider the balance between risk and reward, especially with short-term needs.

Bonus: Look at Your W-4

Receiving a big refund simply means that you gave the government an interest-free loan that they paid back at tax-time. You want to structure your finances so that you don’t receive a refund in the first place. 

How can you do that?

Double-check your withholdings on your W-4. This document should be updated annually—what applied last year might not apply this year. Your withholdings change depending on your filing status. If you recently got married, for example, you should indicate that on your W-4 and adjust your withholdings accordingly. 

If you receive a large refund, make the change on your W-4 for the following year to correct the overpayment. Instead of giving the government that free loan, deposit that money into a savings account that pays you interest.

Use Your Refund Smarter in 2021

Income tax refunds feel exciting—like free money. But, remember, that was your money all along. Instead of blowing your refund on non-productive expenses, consider one of the many ways that you can use your refund to get you further ahead.

Call us today to discuss the best options for you.

First Dakota Wealth & Trust is the fiduciary investment department of First Dakota National Bank with trustee powers to serve clients during their lifetime, during incapacity, and after death. We help clients develop a financial roadmap to help simplify their financial future.

Disclaimer: 

Please note that neither First Dakota National Bank nor First Dakota Wealth & Trust Department, or its employees provides tax or legal advice. This is intended for informational purposes and is not intended to constitute legal or tax advice. Please consult your attorney and/or tax professional for advice related to your specific situation.