Taxes returns need to be filed in less than a month, but many of those expecting to get money back have already sent their forms into the IRS and are starting to receive their checks.
Nearly 80 percent of filers receive some money back from Uncle Sam at tax time. People are so excited to receive their refunds that thousands are flocking to the government’s Where’s My Refund page at any moment to check on when they’ll get their check. So far this year, the average refund amounts to nearly $3,100, up 2 percent from last year.
Related; 4,561 People Want to Know Where Their Tax Refund Is Right Now
A third of those expecting a refund say they plan on using it to pay down debt, and another third say they’re going to invest the extra cash, according to a recent survey by Bankrate.
It’s tempting to take that cash a plan a vacation and go on a shopping spree, but for Americans notoriously bad at saving money or planning for their fiscal futures, there may be more prudent uses of the extra dough. Instead of blowing it all on an extravagant purchase, set aside a few hundred bucks for a splurge and use the rest to get started on your financial planning checklist.
First, be sure you’ve got a fully funded emergency account with enough cash to cover at least three to six months’ worth of expenses, and pay off any high-interest debt. A refund from the IRS may also allow you room to make sure you’re contributing at least enough in your 401(k) to get the full benefit of your company match.
From there, your next step will depend on where you are in life and what your financial goals are. Not every 20-something wants to buy a house, and not every 40-something wants to pay for her kids’ college, but the ideas below will offer a few smart options for making the best use of a tax refund at any age.
In Your 20s
Pay down your student loans: If you’ve still got student loans, put the extra cash toward an extra principal payment. Borrowers are defaulting on student loans at the highest rate in 20 years, and millennials who can’t get out from under their loans are less likely to move out on their own or get married than their debt-free peers.
Start saving for a house: While you may be able to get a mortgage for as little as 3 percent down these days, the bigger your down payment the better your rate (and cheaper your loan) will be. You’ll need at least 20 percent to get the best possible rate on a mortgage, and it’ll give your more equity in the house once you’ve purchased it.
In Your 30s
Open a Roth: Unlike a 401(k) or a traditional IRA, a Roth IRA or Roth 401(k) allows you to save money after taxes but make withdrawals tax-free in retirement. They’re great vehicles for young savers who are likely in a lower tax bracket now than they will be in retirement. “The younger you can start a Roth, the better it is,” says Dawn Humphrey, a senior wealth planner at SunTrust Private Wealth Management.
Roth accounts also offer you some tax flexibility for withdrawals when paired with more traditional retirement accounts. This year you can put up to a total of $5,500 in a traditional IRA, a Roth IRA or a combination of the two (that limit goes up to $6,500 for anyone 50 or older at the end of 2014).
Related: These 4 People Blew Their Tax Refunds in Absolutely Unforgettable Ways
Stash it in an HSA: If you’re in a high-deductible health plan, you may be eligible to open a health savings account. This year you can put up to $3,350 for an individual and $6,650 for a family into an HSA account, which grows tax free and can be used to cover any out-of-pocket medical expenses. HSA money rolls over from year to year, so even if you don’t use it up now it could come in handy for unexpected future medical expenses or in retirement.
In Your 40s
Add to your kids’ college fund: If your retirement planning is on track and you’re planning to help your kids with college expenses, 529 accounts are among the best tools out there. You’ll owe federal taxes on contributions, although some states offer a break to savers.
Money in the accounts grows tax-free and can be used for qualified higher education expenses, and you can change the beneficiary if one child gets a scholarship or decides not to attend college. “There is a lot of flexibility built in,” Humphrey says.
Meet with a financial planner: If you haven’t yet, it might be time to sit down with a fee-only financial planner to go over your finances to make sure you’re on track for your retirement and other goals.
In Your 50s
Play catch-up on your 401(k): Americans age 50 and older can put an extra $6,000 into their 401(k) account this year, on top of the $18,000 limit for everyone else. With retirement approaching, that’s a smart move.
Related: Wal-Mart Launches In-Store Refunds
Consider long-term care insurance: LTCI policies are not for everyone, but they can be a good tool for those without the resources to cover an extended nursing home stay or in-home health assistance for a retiree. The younger you are when you purchase a policy, the more affordable the premiums will be. Look for a policy with an inflation rider from a company with a solid rating. A healthy 55-year-old might pay $1,000 per year for a plan that would cost a 65-year-old three times as much, according to the American Association of Long Term Care Insurance.
In Your 60s
Whittle down that mortgage: Whether you’re in retirement or close to it, it’s time to get serious about getting rid of that mortgage. Your nest egg will stretch much further if you’re not making payments on a home loan every month. “The most successful retirees are those with little or no debt, and your biggest debt is your mortgage,” Humphrey says.
Meet with an estate planner: Even though you may not want to think about it, having your estate in order will give you peace of mind as you enjoy the next few decades. Use this opportunity to talk to your kids about your future plans and get a will, health care directive and power of attorney set up now, before you actually need it.
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