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How to use your tax refund wisely

May 10, 2022
Empower Insights

A tax refund can help build financial stability

If you’re getting a tax refund this year, you might be contemplating all the ways you could spend that money. Treating yourself to something fun is one way to spend your tax refund, but you might also want to consider using your refund to get ahead financially.

Here are five ways to use your tax refund as a tool for investing in your future.

1. Pay off high-interest debt
Credit cards often carry high interest rates. With a lot of interest compounding against you each month, it can be difficult to make your credit card payments and still put money away for retirement or an emergency fund.

Consider using your tax refund to wipe out your high-interest debt . If your refund isn’t enough to fully eliminate your balance, consider using it as a way to kick-start your debt-payoff plan.

2. Contribute to an emergency fund
Financial professionals recommend saving for an emergency fund that can cover about three to six months of expenses. An emergency fund helps protect you from financial hardship in the face of unexpected expenses, like a large medical bill or job loss.

Your tax refund may not be enough to fully fund an emergency savings account, but you can still use it as a jumping-off point. Even just a few hundred dollars to start can give you some peace of mind knowing you have the ability to cover financial hiccups, like car repairs or a temporary reduction in work hours. 

Use this emergency savings calculator to determine how much is suggested for your emergency fund.

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3. Save for retirement
Putting your tax refund in a retirement savings account can pay off in the long run as your savings may benefit from potential market growth. In addition, any investment returns you earn will produce earnings of their own — a phenomenon known as compounding that can have a major impact on your long-term savings.

While you can’t contribute your refund directly to a 401(k), you can use the cash to pay for regular expenses and bump up the percentage you contribute to your 401(k).

In 2022,  you can sock away a total of $20,500 in your 401(k) plan on your own (not counting any employer-matching dollars). If you’re age 50 or older, you can put away up to an additional $6,500 in catch-up contributions.

4. Invest in a brokerage account

Maybe you’ve maxed out your annual retirement contribution limit, but don’t want to lose your investing momentum. Taxable brokerage accounts, like the Empower Investment Account, offer another way to invest money for short and long-term financial goals.

Although you need a financial institution, such as Empower, to open the account, you are in full control of how much you transfer and withdraw. To start investing, you’ll deposit money into the account by transferring funds from an existing account such as a checking or savings bank account or another taxable brokerage account.

The Empower Investment Account (EIA) is intended for knowledgeable investors who acknowledge and understand the risks associated with the investments available through a brokerage account.

Investing involves risk, including possible loss of principal.

Learn more about opening an Empower Investment Account

5. Treat yourself
There’s nothing wrong with setting aside some of your tax refund to reward yourself, too. Treat yourself to something you wouldn’t normally buy or spend some of your refund on home improvements that will potentially increase the value of your home.

Keep in mind that getting a refund means you’re giving the government an interest-free loan. Talk to your employer about adjusting your withholding if you’d prefer to get that money in your pocket each pay period rather than as a lump sum when you file your taxes. 

GWFS Equities, Inc. may receive a fee from mutual fund companies participating in the Empower Brokerage service for providing certain distribution, administrative and shareholder services.

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