I’m a Financial Advisor: The No. 1 Thing Middle-Class Americans Should Do With Their Tax Refund
Written by
Angela Mae Watson
Edited by
Jenna Klaverweiden
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Middle-class Americans could be getting a larger tax refund this year. This is thanks to the IRS not updating the federal income tax withholding tables, despite changes under the One Big Beautiful Bill Act. Heather Berger, an economist with Morgan Stanley, expects the average refund will increase by 15% to 20%.
Whether you get a larger refund or not, the question becomes this: What should you do with it? Here’s what Alex Astin, RIA, CEP, a financial advisor at Burns Estate Planning, suggested.
Also see three questions that sound small but change your refund big-time.
Invest It In Yourself (Present or Future)
“While you may be tempted to spend the refund on fun purchases, it’s a good idea to invest that money in yourself,” Astin said. “That could include paying down high-interest debt, padding the emergency fund or contributing to a retirement account.”
Before worrying about your savings, start paying down any high-interest debt. If you don’t have an emergency fund and your debt levels are manageable, start saving for a rainy day. Three to six months’ worth of living expenses is a good goal to shoot for. If you have dependents or unstable income, you might want to set aside more than that.
Once all else is squared away, look into maxing out your retirement accounts. The maximum annual contribution for IRAs is $7,500 (or $8,600 if you’re over 50). Investing in your retirement accounts every year can set you up for a happy, comfortable retirement.
“That doesn’t mean there isn’t room for fun purchases,” Astin said, “but evaluate your finances and make sure your future is taken care of before you spend it on other purchases.”
Does the Extra 15% to 20% Matter?
That extra 15% to 20% matters as far as having more money to put toward other financial goals, but what it breaks down to is likely a few extra hundred dollars (give or take). For someone in the middle class, it’s helpful, but not life-changing.
Also, it’s important to remember that a tax refund simply isn’t extra money. “While many may think of their tax refund as a bonus check or extra money, that really isn’t true,” Astin said. “Your tax refund is your own money that you worked hard for, and it was withheld from your paycheck. The government essentially held an interest-free loan all year and is simply giving it back to you.”
If you’re receiving a larger-than-expected refund, Astin still suggested investing it into your future. You can also adjust your withholding so your tax refund is as close to $0 as possible. That way, you’ll have more money throughout the year that you can invest or save.
More From GoBankingRates
