Tips for Investing Your Tax Refund

NEW YORK (MainStreet) — Investing your tax refund this year will help you get a head start on your savings for the year, investment experts said.

Consumers should opt to save their tax refund instead of spending it on disposable and depreciating items. Allocate the extra money toward your emergency savings or pay off an existing credit balance, said Jeff Speight, business development manager at Tanglewood Wealth Management, a Houston financial planning firm.

Another option is to use the refund to ramp up your retirement portfolio by allocating the refund to your 401(k) or an IRA.

Also See: 10 Tax-Day Friendly Tricks, Tidbits and Trivia

 

"If you have an emergency fund and pay off your credit card balance, consider using the extra cash flow to increase your 401(k) contributions," he said.

With the average refund yielding $3,000, investors who put that amount toward an IRA or Roth IRA will have reached half of the contribution limit, depending on whether they qualify, said Charles Sizemore, a CFA based in Dallas who manages four investment portfolios on Covestor, an online marketplace for investing.

"With wage growth being stagnant over the past decade, saving money can be something of a challenge, he said. "However, $3000 placed into a traditional IRA is worth an immediate $750 in tax savings in the 25% tax bracket."

Investing your tax refund now means you can easily double the amount within ten years. Assuming market returns of 8% to 10%, a $3,000 investment today would grow to between $6,476 and $7,781 if it was invested in a basic mutual fund or exchanged-traded fund tax free over ten years, Sizemore said.

Purchasing "as many shares of a solid large cap dividend paying stock," is another option for investors, said Jeff White, CEO of American Financial Group, a registered investment advisor in Philadelphia.

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