If you have a refund check coming your way, consider using it to bolster your personal balance sheet. According to the IRS, the average refund will be about $3,300, and many receive the money within three weeks of filing their returns if they file electronically and elect to have their money sent by direct deposit to their bank account. That’s a nice chunk of change.
Here are five smart money moves to make with your tax refund.
#1: Boost Your Retirement Savings
You can contribute up to $6,000 to a Roth IRA for 2022 (or $7,000 if 50 or older) -- and withdraw the money tax-free in retirement. You can contribute the full $6,000 as long as your income falls below $144,000 if you're single (for tax year 2022), and $214,000 if married filing a joint tax return.
If you work and your spouse does not, you can also contribute to a Roth IRA in his or her name if your joint income is within the prescribed limits. Even if you've retired from your main job but are working part-time, you may be able to contribute to a Roth. If you earn too much for a Roth, you can contribute to a nondeductible traditional IRA, then convert it to a Roth.
#2: Fund a Taxable Account
Use the extra cash to buy shares in a mutual fund or stock you've been considering -- but may feel is too risky for your IRA or not available in your 401(k) plan.
#3: Build Your College Savings
It's always hard to juggle saving for college and retirement. Here's an opportunity to use your extra money to contribute to a 529 account. You'll be able to use the money tax-free for college bills, and you could get a state income-tax deduction for your contribution.
#4: Help Your Kids Save
You can use the extra money to contribute to a Roth IRA for your child. Your kid is eligible as long as he or she has earned income -- from mowing yards or babysitting, for example. Your child can contribute up to $6,000 or the amount of his or her earned income for the year, whichever is lower, and you can give him the cash to do it.
#5: Give to Others
If you have your financial bases covered, consider using your refund to make a charitable contribution to help others in need. You'll feel good -- and you'll be rewarded for your good deed when you file your tax return next year (charitable contributions are deductible if you itemize).
You also can use your refund to help accumulate enough money to open up a donor-advised fund. Most funds require a minimum of $5,000 to $10,000. You can claim a tax deduction in the year you make a contribution to the fund, but you have an almost unlimited amount of time to decide which charities to support.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
Prior to investing in a 529 Plan investors should consider whether the investor's or designated beneficiary's home state offers any state tax or other state benefits such as financial aid, scholarship funds, and protection from creditors that are only available for investments in such state's qualified tuition program. Withdrawals used for qualified expenses are federally tax free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by FMeX.
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