Daily Local News (West Chester, PA)

What are you planning to do with your tax refund?

- By Bronwyn L. Martin

The average refund in 2022 (for the 2021 tax year) was $3,176 for individual income taxpayers, according to the IRS (IRS.gov, “Filing Season Statistics for Week Ending October 28, 2022,” Nov. 03, 2022). If you expect to receive a refund in 2023 after filing your 2022 tax return, will you save or spend it? While you may be tempted to indulge, consider using the money to solidify your long-term financial position.

No matter your stage in life or the size of your refund, there are ways you can use it to help reach your current and future financial goals. Here are a few.

For people starting out in their careers

• Add to your emergency fund. Consider saving enough to have the equivalent of at least three to six months’ worth of income in an emergency fund. This could come in handy if you experience a sudden interrupti­on to your income or a major unexpected expense.

• Pay off student loans. If you are carrying college debt or other loans, applying your refund to the balance can help reduce the total interest you pay or eliminate the debt entirely. Once you pay off your loans, allocate the amount you spent each month on student loans to another financial goal to keep building your financial foundation.

• Invest in an IRA. Think about starting a habit of investing your tax refund each year into an IRA, where any earnings can accumulate on a taxdeferre­d basis. While you are limited to contributi­ng $6,500 annually ($7,500 for those age 50 and older), the savings can add up. For example, investing a $3,000 refund each year from age 26 to 65 earning 7% annually would build to more than $640,000.

For those starting families

• Save for a down payment on a home. A tax refund can make a meaningful impact as you accumulate enough to purchase your first home. Consider saving enough to cover at least 20% of the home’s value. Doing so will eliminate the need for private mortgage insurance, which will cost you extra in interest payments.

• Start or add to a college fund for your children. With the

cost of higher education continuing to rise, starting early and saving often can help you make funding tuition a reality. Certain options may provide tax advantages, so work with your financial and tax profession­als to find the best strategy for you.

• Invest your refund. Consider adding your refund to your portfolio, using it to accelerate progress toward your longterm goals. Your refund could be used to purchase stocks, bonds, mutual funds, or other investment­s that are aligned with your goals, risk tolerance and time horizon.

• Create or update your

legacy plan. Developing a will, trust, or other estate documents is important so that your wishes are clear in the event of your death. If you need to create or update legal matters, use your refund as a reason to take the next step.

For those who have a solid financial foundation

• Apply to home improvemen­ts. If you are planning to remodel your home, you may want to use the money to fund specific upgrades, or to keep as a contingenc­y fund throughout the project.

• Save for starting a new business. If you want to start your own business now or in retirement, the refund can provide a cash buffer to help you get

started. It can either replace some of your regular income or be used to fund expenditur­es required to get the business up-andrunning.

For those approachin­g retirement

• Increase your retirement savings. As your retirement date and goals get clearer, maximizing your retirement savings should take priority. Your refund can help you make an additional investment towards your financial future. If you are 50 or older and have earned income, current tax laws allow you to invest extra dollars in your IRA and workplace retirement plan. Work with your tax profession­al to learn about the opportunit­ies and limitation­s

that apply to your situation.

• Pay down your mortgage. Consider using your refund to make an additional principal payment to your home mortgage. Erasing debt prior to retirement can minimize a major financial burden.

For retirees

• Spend it on your retirement dream. If you plan to travel or pursue a hobby in retirement, use the refund as a trigger to make it happen. Allow yourself to spend the money without guilt — after all, you’ve earned and planned for this opportunit­y.

• Invest in a Roth IRA. If you have any earned income that allows you to make retirement contributi­ons, your tax refund

can likely be placed into a Roth IRA. This vehicle provides potential tax-free growth of any earnings.

• Pay health care expenses. Today’s rising health care costs are often one of the biggest expenses for retirees. Consider applying the funds to Medicare or long-term care policy premiums. If your health care expenses are manageable, save the refund to pay for future expenses.

Review your tax withholdin­g

If you regularly receive a large tax refund, you may want to adjust the withholdin­g on your paycheck. Decreasing your refund may increase your monthly net pay, allowing you to allocate extra income

each month to your financial goals. This strategy isn’t right for everyone. Consult with your tax profession­al and financial advisor before making adjustment­s or deciding how to manage your refund.

Bronwyn L. Martin is a Financial Advisor and Chartered Financial Consultant with Martin’s Financial Consulting Group, a financial wealth advisory practice of Ameriprise Financial Services LLC. in Kennett Square and Havre de Grace, Md. She specialize­s in fee-based financial planning and asset management strategies and has been in practice for more than 23 years. To contact her: www. ameriprise­advisors.com/ bronwyn.x.martin.

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