If you think you may have a tax refund coming, you can take steps to increase it by investing it. By choosing an investment vehicle for the money, and opening an account now, you can turn your tax refund into a wealth-boosting asset.
- Add to or Start Your Retirement Fund
Many funds require a minimum to get started, and your tax refund could meet that minimum (usually $500 or $1000). If you don't have the cash on hand now, you can still create the account and fund it when your money comes in.
Commit to investing all future tax refunds as well, and you could end up with a tidy nest egg. While you are at it, commit to regular contributions each month. Even small amounts will have big results in the long run. Your monthly contributions will reduce your tax burden because they are tax-exempt. (The refund is not taxable, so you won't save on taxes by investing it.)
Through your retirement account, you can invest in:
- Exchange-traded funds. These are similar to mutual funds, but they can be bought and sold like stocks.
- Mutual Funds. You diversify your money because the fund buys stocks of many companies at once. This protects you from losses that result from any one company.
- Bonds. You can purchase bonds, which will provide you with interest income.
- Stocks. You can buy shares of an individual company.
- Open an Investment Account
You can open a regular investment account instead of a retirement account. The advantage here is that you can retrieve the money any time you want because you don't' have to follow the withdrawal rules that come with retirement accounts. Your withdrawals will be taxed.
You can use your investment account to put money into the same investment instruments that are available to retirement accounts.
- Invest in a College Fund
You can put your refund to work in what is called a 529 Savings Plan. This helps you save money to pay for college for your children. The money grows tax-free, and you can withdraw it tax-free if you use the money for tuition, books, or college housing.
- Increase the Value of Your Home
You may wish to invest in your home. Be sure to choose projects that will increase the value of your house, such as remodeling or adding a room. Making minor repairs won't increase your home's value.
- Consider Equity Crowd Funding
You can invest in a start-up business. This choice is for those who can afford to lose the money because many start-ups fail. Equity crowdfunding sites offer opportunities for you to review a company and invest in it. You get equity in the company, and you will participate in profits if the business does well.
Three takeaways
Determine your risk tolerance. Safer investments tend to have lower returns, but you have the comfort of preserving your capital.
Choose higher-risk investments only if you losing your money won't cause sleepless nights.
Only invest money you won't need in the short-term. Fluctuations in your investment value could mean you have less money if you withdraw it in less than a year.
What you can do next
Study all of your investment options. Then make an informed decision about how you want to grow your tax refund money. Open an account for the type of investment you choose and know exactly how to send money to it, so that you won't hesitate when you get the cash.
Callout quote
"Make your investment decision before you file your taxes, so you have a clear plan for what to do with the money."
