A tax refund can feel like an unexpected windfall, and if you don't have a plan for it, you may be tempted to spend it frivolously. However, if you choose to invest the money, you can turn a one-time refund into a wealth-boosting asset. There are a variety of ways to achieve this goal.
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 $1,000). If you don't have the cash on hand now, you can still create the account and fund it when money comes in. As long as the funds are deposited prior to the tax return deadline (April 15th this year), you can include the contribution on your tax return even if the amount is not deposited prior to filing. While you're at it, consider automating a regular contribution for each month moving forward. Even a small amount can create big results in the long run. Your monthly contributions may also 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 can be bought and sold like stocks.
- Mutual funds. You'll diversify your investment because these funds buy stock from multiple companies at once. This may protect you from losses that result from any one company's poor performance.
- Bonds. Bonds are a conservative investment that can provide you with interest income.
- Stocks. You can buy shares of individual companies.
Open an investment account
If a retirement account isn't the direction you want to go, consider opening a regular investment account. The advantage here is that you can divest the money at any time because you won't have to follow the withdrawal rules that come with retirement accounts. However, 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
Put your refund to work with a 529 Savings Plan. This account helps you save money to pay for college for your children. The money grows tax-free, and you can withdraw it tax-free, as long as you use the money for tuition, books, or college housing.
Increase the value of your home
Investing in your home is a way to grow your wealth and improve your lifestyle. Be sure to choose projects that will increase the value of your house, such as remodeling a kitchen or adding a room, versus making minor repairs, which won't increase your home's value.
Consider equity crowdfunding
You don't have to start your own business to reap the financial rewards of a startup. For those who can afford a higher-risk investment, equity crowdfunding sites offer opportunities to invest in new companies. In exchange, you'll get equity and may participate in profits if/when the business does well.