The Internal Revenue Service (IRS), as of the 24th of March, had issued over 59 million refunds, with an average refund of $2,903. This is down 11% from the average tax refund last year of $3,263, however it's still enough for most taxpayers.
If you use the money wisely, a refund of this amount could jumpstart your savings or save you thousands in interest on debt. But only if it is not spent on food and bills.
Here are the best ways to make maximum use of your tax refund in 2023.
Reduce high-interest debt
Credit card debt and other debts that are variable have become more expensive in recent years due to the rising interest rates. Recent stats from Fed revealed that the average interest rate for credit cards it assessed was 20.40%, up from 16.45% in 2021 and 16.28% last year.
You can reduce your debt and interest rates by using your tax refund if you have credit cards with rates similar to this or close. A $3,000 balance on a credit card at 20.4% with a $60 minimum payment per month would require payments over 113 months, with an additional $3,752 of interest.
You may also want to take action on any outstanding debts with high interest rates, such as auto loans, personal loan or other outstanding debts. You will be in a much better financial position and you'll thank yourself later.
You can use a portion your tax refund if you are unable to pay off all your credit card debts at once. You might then consider opening a credit card with a promotional 0% APR to refinance any remaining debt. Cards such as the Citi(r), Diamond Preferred(r), Card offer a promotional 0% APR rate for 21 months (17.74% - 28.49% APR variable afterward).
Increase your emergency fund
While increasing interest rates may make it more expensive to carry debt, they can also be used to boost your savings. There are a number of high-yielding savings accounts and certificates (CDs), which offer some very good rates at the moment, with no fees.
Marcus by Goldman Sachs, for example, offers a 10-month CD with a 5.05% annual percentage yield (APY) if you have $500 in your account. Many of the highest-yielding savings accounts offer high interest rates, such as the CIT Bank Savings Connect Account, which offers a 4.5% annual percentage yield on deposits.
Contribute to a IRA
Your tax refund could be used to boost your retirement savings.
You may be happy with the debt you have and your short-term savings, but want to save more for retirement. If you are eligible, you can increase your contribution to a workplace pension account or a Roth IRA.
Most people will be able to contribute $6,500 in 2023 across all IRAs. People over 50 can contribute an additional $1,000, bringing the total to $7,500.
Remember that income limitations limit who can directly contribute to a Roth IRA. You may not be able to do so if your income is over $214,000. If you're married filing jointly and your income is between $204,000 and less than $214,000. You might be forced to contribute a lower amount. Single filers, head of household, and widowers who qualify may also be subject to income caps or phase-out periods.
While anyone who earns an income can contribute to a Traditional IRA, tax deductions are only available for those who meet certain income and/or criteria requirements.
Create a college fund
It's never too early to start saving money for college, especially if you can afford it.
In many states, you can get tax benefits for contributing to 529 plans. You can also invest in funds that will compound the money over time. Indiana, for example, offers a tax credit of 20% on the first $7500 that you contribute to a college savings plan in 2023.
You can get some relief from overfunding college with the Secure Act 2.0 starting in 2024. Those who have had a 529 college saving plan for at least 15-years will be able transfer up to $35,000.000 in unused funds into a Roth IRA.
Buy a life insurance policy
You can protect your family from the unexpected by using your tax refund for a policy of life insurance.
It's easy for people to put off buying life insurance, but the cost can be less than you pay each month for dinner. It makes sense to get a quote for you and your spouse, just in case.
For example, Bestow allows you to purchase affordable term insurance for your family without the need of a medical exam. You can choose from coverage amounts ranging from $100,000 to $1.5million dollars. If you are between the ages of 18 and 60, you may apply. Bestow's term life insurance starts at only $11 per monthly.
Investing in yourself
You can invest in yourself differently depending on what you want to achieve. For example, you could focus on improving your career or on something completely different. The average tax refund can be used to pay for gym memberships or even a gym at home so that you are in top form. You could invest in a new outfit or dental work that you have been putting off.
You could use the money to join a mastermind, enroll in a certificate course, or pursue another formal education. It's not much more expensive to pay for a year of community school than the average tax return of $3,860, which is the in-district tuition cost for 2022-23.
Spend a little on something fun
It's okay to set aside some of your tax refund for something that you want. You could use the money to buy that vacation you have been wanting for years. Or maybe a new mattress or home decor, or even a laptop for your kids.
You can use some of your refund to help you achieve financial success while also saving some money for an experience or purchase that will make you happy. As they say, 'everything in moderation', and life is more than just taxes and bills.