Five suggestions for investing a tax refund

By May 4, 2019Industry News

Sometimes taking the money and putting it into an investment solution can be extremely lucrative

A tax refund can be a nice surprise and many may view it as the perfect opportunity to do a little shopping. However, prudent planning can often turn that refund into an incredible source of long-term wealth that could result in potentially hundreds of thousands of dollars down the road. With an average refund of $2,700, there’s a lot that can be done to see substantial returns over the long term.

Millennials typically see the largest refunds and have the most time to let the money work for them. The average refund for a millennial is about $3,013, compared to the $2,944 for those of Generation X and $1,943 for baby boomers. When the check is received, stop – think twice and consider one of five investment options.

Investing in an IRA, an individual retirement account, is an easy and great way to save for later. Plus, an IRA has the advantage of allowing for contributions to be taken out at any time – with no penalties incurred – as long as the investment earnings remain in the fund.

The refund can also be put into a 401(K), with a little bit of juggling. It isn’t possible to put the money directly into the fund, but it is possible to increase the monthly contribution amount to equal the refund amount (over 12 months) and add the refund to a regularly-used bank account. Discipline will ensure that everything continues to move forward according to plan.

Anyone with a little bit of investing experience could consider taking the refund and using it to invest in stocks, mutual funds and similar investment vehicles. There are investment apps today that make the process simple and painless, allowing traders to get the maximum out of their investments.

Similar to the investment apps, robo-advisors are available and can offer a range of diversified investment portfolios. Once an investor builds a portfolio, the robo-advisor uses sophisticated algorithms to manage the investment funds for low commissions. They are also required to adhere to the same regulations as human advisors, giving investors an extra level of comfort.

For those that are comfortable with their income levels and don’t necessarily believe they need an investment for themselves, they should think about their children. The tax refund can be used for a 529 plan, which can provide tax-free growth on contributions and the money can be used for qualified education costs. Since higher education can cost above $100,000 a year, this could be one of the smartest options.