Less Than 5% of People Plan To Invest Their Tax Refund: All the Ways It’ll Pay Off
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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Tax season can be stressful or exciting, depending on whether you’re getting a tax refund. If you do get a refund, it can be tempting to see that money as “bonus” money and spend it frivolously. However, investing a refund is a much better use of those funds. According to a recent GOBankingRates survey, fewer than 5% of respondents planned to invest their tax refund.
“While it might be tempting to splurge your tax refund on the latest gadgets or indulgences, it’s crucial to remember that this refund is not free money but rather a part of your hard-earned income that’s being returned to you,” said Dr. Sumeet Kumar, NFEC certified financial education instructor and founder of DollarsRise.
Financial experts explain why you should invest your tax refund instead of spending it.
You Can Compound Your Wealth
The most compelling reason to invest in your tax refund is the opportunity to compound your wealth over time, according to Jeff Mains, finance expert and founder of Champion Leadership Group LLC.
“Whether investing in a diversified portfolio of stocks, a retirement account, or even a side business, the goal is to put your money to work in avenues that offer higher returns than traditional savings accounts,” Mains said.
He recommended index funds or ETFs for those with moderate refunds because these provide exposure to a broad range of assets with minimal effort and cost.
“Consider more targeted investments or bolstering your emergency fund for larger refunds, which can save you from debt in unforeseen circumstances.”
Ultimately, the investment choice should align with your financial goals, risk tolerance and timeline, Mains said.
You Can Improve Your Financial Health
Kumar believes that it’s just as important to pay off high-interest debt with a refund, but if you have none, he recommended putting a refund of more than a few hundred dollars into traditional investments, such as stocks, a Roth IRA, or other suitable options depending on your financial situation “to further optimize your financial health.”
You Can Maximize Returns
Investing your tax refund can potentially generate higher returns than just letting it sit in a savings account, according to Dana Ronald, CEO of Tax Crisis Institute.
“You have the opportunity to put that money into diversified investments, such as stocks, bonds, or real estate, which can provide better long-term growth,” he said.
But Don’t Invest It All in One Place
David Kemmerer, CEO of CoinLedger, recommended taking some or all of your refund and investing it but not all in one place.
“[I]t’s still important to practice good investment habits, working through a professional if needed. But, even if you have some of the amount earmarked for other uses, even investing a small portion of your refund can be a wise financial move.”
It Helps You Build Wealth
A tax refund may not seem like much, but investing it now can lead to substantial wealth in the future, Ronald said. By consistently investing your tax refund every year, you can grow your savings over time and secure a better financial future.
You Can Save For Retirement
If you haven’t already maxed out contributions to your IRA or 401(k), then using your tax refund can be a great way to boost your retirement savings, Ronald said.
“You can put that money into a traditional or Roth IRA, which can help you save on taxes and provide a comfortable retirement later.”
It Can Lower Your Tax Liability
Investing your tax refund in certain investments can reduce your taxable income for the year, which may help you lower your overall tax liability and keep more money in your pocket, Ronald explained.
“When it comes to investing your tax refund, look at your current financial situation and goals. If you have high-interest debts, it’s best to pay them off first before investing. But if you have no debt and a healthy emergency fund, you can support your entire tax refund or at least a significant portion of it.”
You Can Grow 529 College Plans
Investing your tax refund in tax-efficient vehicles is a prudent decision, especially if you’re aiming for long-term growth or planning for retirement, according to David Brillant, a certified specialist in estate planning, trust and probate law with the Brilliant Law Firm.
He recommended contributing your tax refund into a tax-advantaged account like a Roth IRA or a 529 college savings plan for your children.
“The beauty of a Roth IRA lies in its tax-free growth and withdrawal, making it an excellent choice for maximizing the tax refund’s potential. With a 529 plan, your investment grows tax-free as long as it’s used for qualified educational expenses, which can be a significant relief as education costs continue to rise.”
You Can Fund a Trust
Depending on the size of your refund, if you’re interested in estate planning, leveraging your tax refund to fund a trust can be a strategic move, Brilliant said.
“Trusts offer a multitude of benefits including asset protection, tax efficiency, and bypassing the probate process, which can be both time-consuming and costly. By funding a trust with your tax refund, you’re not only investing your money wisely but also ensuring that your heirs benefit from a well-structured estate plan.”
Ultimately, the choice to invest your tax refund, rather than spending it immediately, can contribute significantly to your financial security and wealth-building efforts, Brilliant said.
“Whether it’s enhancing your retirement savings, planning for your children’s education, or funding a trust, the potential long-term benefits of investing your tax refund are too substantial to overlook.”
Methodology: GOBankingRates surveyed 1,005 Americans aged 18 and older from across the country between Jan. 23 and Jan. 26, 2024, asking fourteen different questions: (1) How do you plan on filing your taxes for this year?; (2) When do you expect to file your taxes this year?; (3) How much do you expect to receive in a tax refund?; (4) What do you plan to do with your refund?; (5) Do you feel confident you are receiving all the deductions you feel qualified for?; (6) Do you believe your tax dollars are being spent effectively?; (7) Do you believe you are paying too much, too little, or a fair share in taxes?; (8) Have you ever been audited before?; (9) Who will/would use your tax dollars the best?; (10) How much is the standard deduction for a single filer (and married filers) in 2024?; (11) What concerns you the most about Tax Day?; (12) Do you expect your tax refund this year to be more or less than last year?; (13) What do you understand the least about your taxes?; and (14) What would you rather be doing than your taxes? (Select all that apply). GOBankingRates used PureSpectrum’s survey platform to conduct the poll.
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