If you are expecting a tax refund this year, aim to save some or all of it for the future. Here are five good reasons to use that money for retirement savings.
This is a once a year opportunity. Tax filing season presents a unique opportunity each year for us to save more than we normally would. The average tax refund is close to $3,000. That's a lot of cash received all at once. It's likely that a tax refund is the biggest chunk of change we receive all year. Don't waste this money on mindless spending. Use it to help secure your future. You didn't miss the money all year when you were loaning it to the IRS. So, why would you miss it now? Take advantage of this opportunity and redirect the money to a retirement account.
Tax deductions and credits. The IRS provides tax deductions and credits on certain retirement savings contributions. Put the money in a 401(k) or traditional IRA and you'll likely receive a tax deduction in the current tax year. Put the money into a Roth IRA and you'll avoid paying taxes on that money when you withdraw it in retirement. In effect, you'll be using your money to create more money. Be sure to check with your CPA to fully understand your contribution options.
[See 10 Bargain Retirement Spots.]
You can back date contributions. Some tax-advantaged retirement accounts allow you to apply your contribution to the previous tax year's contribution limits. That means you have up until April 18th, or when you file, to make a contribution. Each year that passes represents another opportunity to contribute to retirement accounts. And with some accounts, you're given an extra four and a half months to contribute.
You can utilize big brokerages. Your tax refund may be a large enough sum to qualify you for funds with the big brokerages. Unlike discount online stock brokers, big brokers like Vanguard don't let you invest in their retirement mutual funds unless you put forth two or three thousand dollars. Your tax refund will help you to clear this initial hurdle and then you can make smaller contributions going forward.
You need it. Most of us aren't saving enough for retirement. We need every bit of savings we can muster. A tax refund is money that you weren't missing anyway. So take the money and put it towards a good cause: your financial future.
Philip Taylor is the author of 104 Ways to Save Extra Money. Read his popular blog, PT Money: Personal Finance for more insightful money tips, like his recent suggestions for the best online checking accounts.