Large tax returns, like year-end bonuses, can be a welcome surprise. But while they’re not guaranteed, they can be a powerful tool to boost your financial goals.
Here are three ways to handle a large tax return:
Split it Smart: Balance Present and Future
Let’s be honest, many of us use tax returns for a shopping spree. However, there’s a trick to avoid this temptation: think of yourself as two people.
There’s “present-day you,” excited about the windfall and eyeing some treats. Then there’s “future you” with dreams of big purchases or financial freedom.
Both deserve a piece of the pie. Split your tax return 50/50. Treat yourself guilt-free with half, and save the other half for the future.
Tax-Efficient Saving: Make Your Money Work for You
Tax returns can feel smaller after withholding. But here’s the good news: you can potentially reduce your tax hit by contributing to tax-advantaged accounts:
1. Boost your retirement savings: Many employers allow contributions to 401(k)s with your tax return. This lets “future you” enjoy tax benefits now (traditional IRA) or later (Roth IRA).
2. Max out your IRA: Depending on your income, you might be able to deduct traditional IRA contributions or contribute to a Roth IRA for tax advantages down the line. The deadline to contribute to a 2023 IRA is even further away – Tax Day of 2024!
Building Your Safety Net: Earn Interest Today
Tax breaks aren’t everything. Sometimes, saving your return in a high-yield savings account takes priority. This might be the case if you lack an emergency fund or are planning a significant purchase soon.
Important to Note: Your Large Refund Might be like an Interest-Free Loan to Uncle Sam
A hefty tax return can feel like a windfall, but it might also indicate that you’re overpaying on taxes throughout the year. Think of it this way: you’re essentially giving the government an interest-free loan!
By adjusting your tax withholding, you could keep more money in your pocket each paycheck. This allows you to earn interest on those funds throughout the year, rather than waiting for a lump sum on Tax Day.
Taking Control: Optimizing Your Withholding
Reviewing your W-4 form (used to determine tax withholding) is a smart financial move. An online withholding calculator can help you ensure you’re neither overpaying nor underpaying taxes.
Remember, any extra you save from optimizing your withholding can be put towards your financial goals. Consider a high-yield savings account to watch your money grow while you plan for the future!
No matter how you use your tax return, know that you’re investing in both your present and future well-being.