Unless you left with an accounting degree, filing your first tax return after college can be a little deceiving. A couple government checks in the mail this summer might feel like a consolation prize for a dues-paying job, and you deserve to be king for a day, right?
Hold on a minute. We have a few ways you 20-somethings can make the best use of your tax refund.
Perhaps the Most Underrated: Start Saving
If you get your refund deposited directly in your bank account, it’ll just “show up” one day, like someone just dropped a gift card in your lap. Saving isn’t the most appealing option, but it will be the most rewarding when it’s time to rent a new apartment or put a deposit down on a car. Building your current account isn’t always enough incentive, so here are two ways to keep at it:
- Open a savings account. Already have one? Open another. A hundred dollars buys you a reason to put disposable income aside exclusively for emergencies or other big (but necessary) expenses.
- U.S. savings bonds are another convenient option, allowing you to redirect your tax return into an account that earns ample interest and is safe from inflation. According to TreasuryDirect, classified Series I bonds opened just four years ago this month, and this route requires a simple request via IRS form 8888.
Invest It in Your Retirement
Start building an investment portfolio now. If you feel you don’t have the know-how to purchase stock, the following two retirement investments are ripe alternatives for someone your age. Planning for retirement should always start as early as possible.
- Open an IRA, or individual retirement account. This is a personal account you contribute to each year, and the amount you contribute is tax-deductible. While you have more freedom to adjust and personalize investments like stocks, mutual funds and CDs, you can’t make withdrawals. With a Roth IRA, on the other hand, you pay taxes upfront and then you can make tax-free withdrawals.
- Invest in a company-sponsored 401(k). Don’t miss out on the retirement plan your company offers. Many companies use a safe harbor or match plan. Safe harbor means that if your company contributes to your plan, the funds are yours even if you leave the company a couple months later. A matching plan means the company matches whatever you put into the plan. Some companies will even match up to 6 percent of your salary, according to DailyWorth.com. It’s basically free money.
Pay off Your School Loans
If you owe on student loans, put your refund on that debt. Paying off loans isn’t optional—you have to find a way to pay them anyway—and paying up front and on time is a bigger deal than you might think.
Funding your next bill with a tax return reinforces your credit history, yielding low interest rates on future big-ticket items like a new car, and keeps you paying loan interest at levels that can qualify you for education-based deductions as defined by the IRS later on. Whenever you can contribute a large chunk of money to paying down your student loan debt, do it—whether it comes from your tax refund, an unexpected financial windfall such as lottery winnings or inheritance or selling a structured settlement. The faster you pay them off the more you’ll save on interest, and that’s like money in the bank.
Great article! As a point of interest under investing in retirement. Why not open a self directed IRA. This allows investors to place income producing property in this IRA to fund retirement. You can even finance the purchase through the IRA. It is a great way to create wealth!
Right on, Simon. However, investors should really pay attention to the rules regarding income producing property in an IRA. It’s very difficult to have a mortgage on the property, you can’t use the property personally (or manage it personally), and you have to be able to fund most of the expenses from other pots inside of the IRA. If someone knows all those rules, it’s a good plan….but you should have the right custodian to do it.
Really good advice. Pay down bad debt, create and emergency fund, save for retirement. Who can argue with any of these. All so much better than spending it on something you may not need.
I would agree a self-directed IRA might be a bit complicated for the novice.