John Conroe, financial planner and investment officer, Adirondack Trust Co.Courtesy Adirondack Trust Co.
By JOHN CONROE, CFP, AFIM
If you’re like most working Americans, you’ve already seen the signs–your W2 has come in the mail, you’re seeing pop-up accounting shops, and advertisements for DIY tax software is ubiquitous. There’s no denying it: It’s tax season.
Whether you love it or hate it, taxes, for many people, translate to a refund. But before you go spending your hard-earned and returned cash, consider having a plan that can help you in the long run, and even increase its value over time.
Here are a few ideas on how to better use your tax refund, straight from our Adirondack Trust Investments experts:
• Double your tax benefit with a Roth IRA. If you qualify for a Roth IRA, tax season is an excellent time to take advantage. By funneling your tax return into a Roth IRA, you will enjoy doubled tax benefits with tax-free growth and tax-free withdrawal. Win-win.
• Triple your tax efficiency with an HSA. In our last issue of e-Insight, we discussed the basics of a health savings account. If your healthcare plan allows you to contribute to an HSA, you can really get more bang for your buck if you use your tax refund to help fund this account. Not only are your contributions to your HSA tax deductible, but they grow and can be withdrawn tax-free. That’s what we call win-win-win.
• Pay off debt. The only guaranteed investment return is paying off debt. If you have debts, now is a great time to pay them down or pay them off. With today’s credit-card interest rates reaching 15 percent or higher, paying down debts like these yields a high return over the long run, if you consider what it costs you to pay your minimum each month. Pay down the debt, save yourself the interest.
• Create an emergency fund. It’s commonly told that you should keep an emergency fund of six-months’ worth of savings. But all told, that’s a lot easier said than done. There are many ways to start or increase your savings that won’t feel painful–including automatic payroll deductions, using apps to roll up your purchases to the nearest dollar, or even hoarding and depositing your change.
But one way to make a quick and possibly major impact is to use your tax return to buff up your savings. Then you can rest easy knowing you have some cash reserves in case you should need it.
• Save part of your refund. We know–sometimes life gets in the way just when you get your tax refund. It’s understandable to want or need to spend some of your return. However, we would advise you to try your best to sock away at least part of your tax return in one of the ways we mention. It might just be the happy medium you’re searching for this year.
While these tips should help you use your tax return differently in past years, here is just a bit more food for thought: The fact that you are getting a tax return in the first place means that you either don’t pay a large amount in taxes, or that you have too much being withheld. The best advice? Consider recalculating, and then direct more money automatically to your company’s 401k plan, or to your personal savings or investing program.
Conroe is vice president and financial planner and investment officer at Adirondack Trust Co.