Tax day is right around the corner! For some of us, it’s the one time a year when we receive an unexpected windfall in the form of a large tax refund check. The top three things you should consider doing with your tax refund check are paying off debt, building an emergency fund and saving for retirement.
Pay off credit card debt
Credit card debt usually carries a very high-interest rate. One of the best financial moves you can make with a large tax refund check is to pay off high-interest rate debt. Paying off credit card debt is only the beginning. Paying off the credit cards doesn’t improve your situation if you run them up again during the year. Getting off the debt treadmill is critical! Commit to controlling your spending and use your tax refund to jump-start your journey to financial independence.
Start an emergency fund
Once you have a spending plan that works for you, the next step is setting up an emergency fund. An ideal emergency fund will cover three to six months of living expenses. Use your tax refund to start an emergency fund or to build up your emergency fund if you already have one. An emergency fund helps you deal with unexpected expenses.
Make a retirement plan contribution
Once your debts are under control and your emergency fund is ready, it’s time to think long-term. Your tax refund is a great source of cash to make a retirement plan contribution. Two of the most popular options are the traditional IRA and the Roth IRA. Traditional IRA contributions are usually tax-deductible – saving your refund this year can get you a bigger refund next year! Roth IRA contributions aren’t deductible, but they provide tax-free growth and retirement income. Both of these are great ways to put your tax refund to work. Your financial advisor should be able to give you advice on which of these is best for you.
Adjust your withholding
One final tip on tax refunds: if you get a large “tax refund” it means you probably paid too much in taxes during the year. Ask your tax advisor to review your withholding. Make sure you don’t have too much withheld from your paycheck, pension, or retirement plan distributions. Getting a big refund check can be exciting, but that money could have been working for you all year!
Peter C. Golotko is president and CEO of CPS Investment Advisors. Matthew Treskovich is the Chief Investment Officer for CPS Investment Advisors.