Don’t Blow Your Tax Refund

Syria! Tariffs! Mueller Investigation! Facebook under Fire! Corporate Earnings! All of these headlines have moved markets over the few weeks, leaving investors whipsawed and exhausted. If you’re keeping score, the Dow and S&P 500 are down slightly on the year (-1.5 percent and -0.7 percent, respectively), while the Russell 2000 and NASDAQ Composite are up (+0.9 percent and +3 percent, respectively).

For those worried about poor Mark Zuckerberg and his Facebook empire, everything is just fine. Sure, the social media giant’s stock price is down 6.8 percent in 2018, but it remains UP a staggering 500 percent over the past five years, compared to the NASDAQ Composite, which has gained 116 percent during the same time horizon.

Meanwhile, in the universe that you CAN control, we are heading into the final 48 hours of tax season. (If you need help filing, here are some Last Minute Tax Prep Resources.) The IRS reports that through April 6th, nearly 80 percent of processed returns were due a refund and the average amount is $2,864. By now, most people understand that a tax refund is really just the return of a year long, interest-free loan that you extended to Uncle Sam. Still, it’s clear that the “found” money can be a great way to jump-start a lot of your financial goals. So before you run out and blow it on a new iPhone or a summer vacation, here are some ideas that might be more useful.

Replenish emergency reserves:  Ideally, those who are working will have six to 12 months worth of expenses in a reserve fund and retirees should have 12-24 months. If you have fallen below those levels, the refund check can help replenish the account.

Pay down credit card, auto and student debt: Your refund is an excellent way to put a dent in outstanding debt. The bonus is that when you pay down debt, you are essentially earning a guaranteed return that is likely much higher than any investment available. Start with the highest interest debt and work your way down.

Save for a near-term expense: Will you need to replace a car this year? Is there a looming tuition payment? After you have replenished your emergency reserve fund, start saving to fund expenses that will occur this year.

Boost retirement contributions: If you have access to an employer-sponsored retirement plan, like a 401(k), a 403 (b) or a 457, increase your contribution amount for 2018. The limit this year has increased to $18,500 and if you are over age 50, you can add an additional catch-up contribution of $6,000.

You can also use tax refund money to fund a Roth or Traditional IRA for tax year 2018. The maximum you can contribute to a traditional and Roth IRAs is the smaller of: $5,500 ($6,500 if you’re age 50 or older), or your taxable compensation for the year.

Fund 529 plans: Is someone in your family struggling to save for education? If so, consider funding a Section 529 plan. The new tax law expanded the use of 529s to include plans K-12 private school expenses, but some states are not going along. Instead, they are still treating any non-college withdrawal as a non-qualified distribution and could charge you penalties, so double check with the plans directly.