8 Smart Ways to Spend Your Tax Refund

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Even though financial experts recommend setting your tax withholdings so that you don’t get an income tax refund, many people continue to overpay and receive money back. What to do with that found money? Here are eight smart ways to spend your tax refund.

Pay off debt
Applying your tax refund toward credit card or other debt is a smart move. By paying down debt, you actually save money twice — the principal you owe and less interest to be paid. Paying down debt also can improve your credit score.

Build an emergency fund
It’s a good idea to have some money put away to help you out in case of an emergency. Most experts recommend anywhere from three to six months’ salary. You can use your tax refund to either start or pad your emergency fund.

Invest for retirement
The government allows you to invest several thousands of dollars a year outside your work-related retirement plans in an individual retirement account. You can take your tax refund and start or add to one of these funds. Contributions to a traditional IRA are tax deductible and then taxable when you withdraw them in retirement. Contributions to a Roth IRA are not tax deductible but can be withdrawn tax free in retirement.

Start an HSA
If you have a high-deductible health insurance plan, you are eligible for a health savings account, which allows you to contribute money tax-free and then use it tax-free for unreimbursed health expenses. You can start or add to an HSA with your tax return, as long as you remain below the annual contribution limit.

Use it for a down payment
If you are saving to buy a new home or if you need a new car, you can use your tax refund toward the down payment amount that you need.

Make energy-efficient improvements to your home
A tax refund can offer you the money to make energy-efficient improvements to your home, such as installing a smart thermostat, replacing your traditional bulbs with compact fluorescent ones or weatherizing your home.

Donate to charity
If your tax refund was unexpected and you don’t need the money, you can put it to work for others by donating to charity. Because donations are tax deductible, the money goes farther.

Use it to start a business
If your dream is to start your own business, a tax refund can help start you on your path. You can use your tax refund as capital to get your business started and leverage other financing from lenders or investors.