3 Ways to Use Your Tax Refund for 2022
If you have an IRS check headed your way soon, chances are, you already know how you’re going to use your tax refund for 2022.
Sure, upgrading your appliances would be amazing. Or taking that trip abroad.
Before you spend the money, we encourage you to think about your financial future for a moment.
Americans are now more responsible than ever for creating their own personal pensions. Whether it’s a 401(k), IRA, or other form of savings, it’s now up to you to create your own retirement income.
There is one simple thing you can do TODAY that may make a difference during retirement…Use your tax refund for 2022 wisely and invest it in your financial future.
No matter how big or small your refund, there’s no better way to spend your tax refund than to invest in yourself and in your future.
Robert Shiller, global economist and 2013 Nobel Laureate in economics, put it best when he said…
“Retirement is a once in a lifetime event. You better get it right.”
Keep reading for 3 ways to use your tax refund for 2022.
#1 Boost Retirement Savings
A benefit of investing your tax refund into a 401(k) or IRA is that it allows you to save more without affecting your take-home pay.
You also won’t have to cut expenses from your budget or pay less down on your debt.
If you invest your tax refund into your 401(k), it needs to go through payroll deduction.
We recommend you contact your Human Resources department, tell them the amount you want to invest, and they will take it out of your paycheck(s). Then use your tax refund to live on and make up the difference during this time.
We recommend you use IRS Form 8888 to redirect your full refund into your traditional or Roth IRA. While you can have the refund check deposited into your bank account, and then increase the amount automatically drafted each month into your IRA, you run the risk of spending the money.
[Related Read: Retirement Plan Contribution Limits for 2022 ]
#2 Pay Down Debt
According to a recent Federal Reserve Bank of New York report, total household debt increased by $333 billion in the fourth quarter of 2021 to $15.58 trillion – the largest quarterly increase since 2007.¹
Debt has also increased in households where the head of the family is 55 or older – from 53.8% in 1992 to 69.4% in 2019, according to a study by the Employee Benefit Research Institute.²
Carrying debt into retirement may significantly impact your retirement lifestyle, which is why paying down a chunk of it now is #2 on our list of how to use your tax refund for 2022.
Make it a priority to carry little or no debt into retirement. Once you get that refund check, pay down on a credit card, student loan, or mortgage.
[Related Read: Pay Off Debt or Save for Retirement? Which Comes First? ]
#3 Stash Cash
Another way to boost your emergency account is to fund it with your tax return
If you don’t have one, now is the time to start funding one. If you have an emergency fund already but it’s not fully funded, put all or a percentage of your refund check in there.
Experts advise people should save 10-15% of their income.
Let’s say you’re currently saving 8% of your income in your 401(k). You should take the remaining 2-7% and fund a savings account for emergencies until the account is fully funded.
If you’re already saving 15% of your income, see if you can put an additional 1%, 5%, or even 10% into your rainy day fund.
Put Your Financial Future First
Whether your refund is $400 or $2,500, if you spend your tax refund wisely, it may make the difference between being comfortable at retirement versus struggling to get by.
If you want to catch up on your retirement savings, we recommend seeking third-party advice as soon as possible.
A May 2014 study conducted over a 6-year period compared those who had help with managing their 401(k)s and those who did not. The study revealed…
“On average, the median annual returns for participants in the study who got Help were more than 3% (332 basis points, net of fees) higher than people who didn’t get Help.”³
In another 2014 report, Morningstar’s former Head of Retirement Research, David Blanchett, CFA, CFP, stated that participants who received expert guidance had as much as 40% more income during retirement versus those who received no help at all.⁴
How much would 40% more income impact your retirement lifestyle?
Chances are, it may make a big difference. We encourage you to sit down and write out the impact an extra $20,000, $50,000, or $100,000 of retirement income would have on your life.
Remember: no matter your age or how much you have saved to date, it’s never too late to take control of your financial future!
If you’d like more tips on how to have more income at retirement, download our guide on How to Supercharge Your 401(k) Performance Today.
Sources:
- https://www.newyorkfed.org/newsevents/news/research/2022/20220208
- https://www.ebri.org/docs/default-source/testimony/t-185.pdf?sfvrsn=fa363b2f_6
- AON Hewitt “Help in Defined Contribution Plans: 2006 through 2012”, May 2014
- David Blanchet, Head of Retirement, CFP, CFA, Morningstar 2014, “The Impact of Expert Guidance on Participant Savings and Investment Behaviors”
