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What to Do with Tax Refund – Smartest Ways to Spend Your Tax Refund

What are the smartest ways to spend your tax refund? I'm sharing four of my tax strategy examples to show you what to do with tax refund so that you earn more money on it.

pink piggy bank with black glasses with text overlay "smartest ways to spend your tax refund to double your money"

Isn’t it human nature to want just a little more?

This time of year can feel like winning the jackpot for some, and a time to pay the piper for others. I’m talking about taxes. You can bet that if you are anticipating a tax refund, you are much more likely to file your taxes as soon as you’ve collected all the forms.

Tax season can feel like winning the jackpot for some, and a time to pay the piper for others.

Who wouldn’t be in a hurry to receive a big, fat check or deposit? (Note: whether or not it’s a sound financial decision to get a refund each year is an entirely different discussion).

So before you figure out how you want to spend those crisp twenties, I want to show you how to instead increase your “holdings” (i.e., your tax refund) without gambling at a casino, under-reporting income earned, or taking on any risk at all. Intrigued?

Double Down Strategy #1: Double Your Tax Return Benefits by Using it to Pay for Your Retirement

When you think about retirement, are you stuck in disillusionment somewhere between your dreams and the reality of an empty retirement account?

Perhaps this is because you are currently (and have been) living paycheck to paycheck and any extra savings you squeeze out of the month goes towards putting out last month’s fires.

All of the financial gurus (and me!) say to start saving no matter what, but figuring out how to save money seems overwhelming when you are worrying about more present-day concerns like variable electricity bills and car repairs.

If this describes you, and you're left wondering, “how can I save for retirement?” then I’ve got an idea I’d like you to entertain.

Yes, it involves you putting money into a retirement account, just like what all of the other retirement articles out there tell you to do (obviously a very sound strategy to retirement savings).

But please keep reading, as this information and strategy has the potential to help you fund a retirement without dipping into your monthly paycheck.

Tax Benefit Number 1

Certain taxpayers who meet income limits/filing statuses, and who contribute to a retirement account are eligible for a tax credit called the Saver’s Tax Credit. The limits are:

  • Single, married filing separately, or qualifying widow(er) with income up to $29,500
  • Head of Household with income up to $44,250
  • Married Filing Jointly, with incomes up to $59,000

Depending upon your income, you will be given a credit of up to $1,000 for Single, or up to $2,000 for Filing Jointly. The amount is a percentage of any contributions you have made to qualifying retirement accounts such as an IRA, 401(K), and certain other retirement plans. What a great deal!

Tax Benefit Number 2

On top of a tax credit for funding your retirement account, you can score a tax deduction (without having to itemize deductions). Traditional IRA contributions are made based off of post-tax dollars. This means that at the end of the year contributions are typically tax deductible.

You will receive the Saver’s Tax Credit on top of the tax deduction you can all ready take on contributions to a traditional retirement account.  That is a tax deduction and a tax credit for the same money. And let’s not forget that this money is going towards your own financial future. Again, what a great deal!

Pssst: Still wondering how can I save for retirement? Keep reading!

How to Take Advantage of These Tax Benefits if You Have No Money

At this point you might be excited, but wondering how can I save for retirement by taking advantage of this?

Every year tax refunds and ideas for how to spend them are splattered all over the media—commercials from companies hoping you’ll buy that new appliance and news/media trying to determine how much of a stimulus this refund season will be for the economy. The refund is glamorized, with American taxpayers gleefully skipping down the path of the rainbow towards their new found gold.

In fact, some Americans pay no federal income tax and still receive a tax refund.

According to the Tax Policy Center, in 2011 46.5% of American households will pay no federal income tax. Not only will such a large percentage of American households not owe any federal income tax, but some of these households will receive a tax refund. This is due to the Earned Income Credit (EIC). To give you an example, here is a quote from IRS Notice 797:

“If eligible, you can claim the EIC to get a refund even if you have no tax withheld from your pay or owe no tax. For example, if you had no tax withheld in 2011 and owe no tax but are eligible for a credit of $829, you must file a 2011 income tax return to get the $829 refund.”

Call me crazy, but with so much advertising and media coverage of this joyful time in the U.S., I have a hunch that most people are not saving their tax refund; they are spending it.

For families living paycheck to paycheck, this probably does feel a little like winning the lottery and I am sure you have some pent-up consumer demand for things that you could not afford over the last year (maybe a washer broke, the car needs a repair, extracurricular activities for your child, medical needs, etc.).

In this case a tax refund actually fits well into your budget plan for the year. But what if you harness your tax refund instead?

Doing so could reap you two tax benefits unavailable to others, as well as lead you on the path to a retirement more comfortable than your present circumstances.

Let’s recap:

  • Get a tax refund
  • Fund a traditional retirement account (such as a traditional IRA)
  • Next year, get a tax deduction for the traditional retirement contribution, and a tax credit from the Saver’s Tax Credit…all funded by your tax refund to begin with
  • Did I mention you should roll this as long as you can? Take that money you gained from the Saver’s Tax Credit and Tax Deduction, and use it to fund next year’s retirement account contributions…get tax credit and tax deduction…rinse and repeat {suddenly retirement’s not looking so bleak}

Pretty cool, huh?

And you can get the party started early by setting up a traditional IRA right now and contributing an amount into it that you anticipate you will get back in a refund. The IRS allows you to fund last year’s retirement contributions until you file your return (or else you will need to amend it), or by April 15th, whichever comes first. That way you can claim your Saver’s Tax Credit and Traditional IRA deduction on this year’s tax return, starting the cycle early.

Now, Roll Your Double Tax Benefits to Maximize Retirement Savings

To do this for one year is great. But what if you take part of your tax return every year and make a retirement account contribution?

Your retirement savings would continue to grow, funded in large part by tax benefits. You could start this year by investing part or all of your refund, reaping you a larger tax return for next year. Next year, you can take that tax refund and contribute to retirement, reaping you a larger tax return for the following year.

Do you see a nice pattern forming? So long as you meet the requirements, you could essentially roll the tax benefits and contribute to your retirement every year.

The money is technically not coming out of your monthly pay (though I say this with caution because you could adjust withholdings and have more money in your paycheck each month and less of a refund each year). And while you will be investing in one lump sum (and not dollar cost averaging), not saving for retirement at all is a much greater risk than short-term market volatility.

Double Down Strategy #2: Stuff an Interest-Bearing Account with It

Savings accounts aren’t earning that much interest at the moment (oh, for the days of 5% interest!). But you still earn something, and money earning its own money is pretty exciting anyway you cut it. This one tip alone can earn you thousands; since opening my savings account in December 2005 I have “earned” our household $2,204.83.

Did I mention that this extra two grand accrued while I was showering, eating, and watching Meet the Fockers for the millionth time?

Double Down Strategy #3: Put it Towards Your Mortgage

It’s not cool-sounding to take your new check and put a chunk of it onto your mortgage. But let’s see if we can add to the allure. What if I said you can:

  • Turn $1,000 into $4,121.67*
  • Turn $2,000 into $8,140.94*
  • Turn $3,000 into $12,059.96*

Much better, right?

(*examples assume you make this payment at the beginning of a 30-year, 5.5% interest, $200,000 mortgage). To easily calculate your own interest saved check this out.

Double Down Strategy #4: Use it to Pay Down Debt

It may not feel like you are “doubling down” when you choose to take your tax refund and pay down part of your debt. But you must remember that you are most likely paying interest on top of your loan. In other words, any deduction in your balance now is a deduction in the amount of future money leaving your pocket.

Take our situation for an example of how much money you can earn back by paying down your debt: we paid our debt off ten years before the last creditor wanted to be through with us. So far (as in, more savings are to come), we’ve added an estimated $2,700 of not-paid interest to our pockets since the fall of 2010. Now that’s what I call doubling down!

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Amanda L Grossman

Personal Finance Writer and CEO at Frugal Confessions, LLC
Amanda L. Grossman is a writer and Certified Financial Education Instructor, Plutus Foundation Grant Recipient, and founder of Frugal Confessions. Over the last 13 years, her money work has helped people with how to save money and how to manage money. She's been featured in the Wall Street Journal, Kiplinger, Washington Post, U.S. News & World Report, Business Insider, LifeHacker, Real Simple Magazine, Woman's World, Woman's Day, ABC 13 Houston, Keybank, and more. Read more here or on LinkedIn.


Tuesday 18th of February 2014

I used mine immediately for debt... that way I didn't feel like I had extra money floating around to spend!

Amanda L Grossman

Tuesday 18th of February 2014

What a fantastic way to use your tax refund! Your future self thanks you:).


Monday 17th of February 2014

Thanks for sharing very nice site!