2017 Tax season is finally here. Many of you already completed your tax returns and many are still working on them, including me. Gosh, life used to be so simple when I didn’t own a business and only had W-2 income!
Almost every year, around this time we get the same question, “What should I do with my tax refund?”
Well, I’ve got a few answers for you.
First, lucky you (or perhaps you intentionally planned to have a refund).
I recommend to all my clients to review federal and state tax being withheld from their paychecks. How much is being taken out every payday?
Here is a neat calculator from TurboTax to help you figure out your exact withholdings.
If you have a refund this year, here is what I suggest you consider doing:
Got high-interest rate debts
Do an inventory of your liabilities. When was the last time you actually looked at the interest rates you are paying on various debts?
Do you have the following debts:
· Credit cards
· Auto loans
· Student loans
I would focus on paying off any liability that has a rate higher than 2%. The reason being is if you took your refund and invested in a safe, low-risk savings account or a CD you will not be able to earn more then 1.5% interest per year.
If you are in the minority folks in our country who have no debts, then your next stop will be to assess your Emergency reserves.
Curveball Fund is Low
Remember our rule of thumb 3 to 6 months of living expenses saved in a separate savings or money market account (FDIC insured).
And finally….if you got all the above covered and still have some of your refund money left, first make sure you adjust your withholdings or, if you are self –employed, reassess your quarterly tax estimates to make sure you are not paying too much tax upfront. I want you to benefit from your money now and not provide an interest-free loan to Uncle Sam.
We all hope to be retired someday…. Let’s save more to get there faster!
Take a look at your retirement plan strategy. Where else can you save more tax-deferred dollars?
· Are you maximizing your retirement plan at work?
· Don’t forget about catch-up contributions in your 401k, as well as IRA accounts
· Contribute to a Roth
· If you maxed out your tax differed accounts, let’s take a look at your taxable accounts, earmarked for retirement.
I want to leave you with this thought:
What is the goal you trying to achieve?
Bigger tax refund or more money in your paycheck?
Decide now and plan accordingly. Your money should work for you, not the other way around.