The smartest thing you can do with your tax refund

Chapter 45: The smartest thing you can do with your tax refund

Do you receive a tax refund year after year after year?

According to the IRS, eight out of ten Americans do. The average annual refund is almost $3,000 per household.

If you’re like most people, that money disappears quickly. Many use it to pay bills, make home improvements, take a vacation or to spurge on a luxury purchase such as a cutting-edge television, fine jewelry, recreational equipment, a new wardrobe or shoes.

Why not make a pledge to do something smart with your tax refund this year and for the rest of your life?

Use all of it — or a significant portion — to save for retirement.

Before you click off this article and go back to dreaming about your next big screen television, consider the realities. According to most experts, it takes one million dollars or more to live comfortably in retirement. Yet the Government Accountability Office reports that the typical American approaching retirement has just over $100,000 in savings.

Saving your annual tax refund can go a long way toward making up that retirement saving gap. Let’s do some simple math to see how.

Say you’re 50 years old and receive the average $3,000 tax refund each year. You put that money into an IRA or other similar savings vehicle annually until you turn age 70. Assume your money earns six percent each year, a reasonable amount for a well-managed portfolio. In the end, you’ll have more the $125,000 to enjoy in retirement.

The other plus about saving your refund in an IRA or similar vehicle is that the contribution is deductible from your current year taxes. Your refund will actually help lower the amount you pay in taxes next year. If all things are equal, this move could earn you a bigger refund next year.

Another thing to consider:

If your retirement savings are healthy and you’re on track to reaching your goals, think about saving your tax refund in a Roth IRA. You won’t be able to deduct your contribution from your current year taxes, but this move will provide you with greater flexibility in how you manage your tax situation after you retire. Your accountant, tax professional or financial advisor can explain more and help you determine if this is a smart move for you.

Saving your tax refund every year from now through retirement is a good step toward bridging your retirement saving gap, but it’s likely not enough to get you to a comfortable retirement. Another option is to earn additional money prior to and in retirement. Many people build their retirement plan around both finding ways to save more and earning additional income.

One of the easiest ways to earn income in retirement is by working online or starting an online business. You work when and how often you want, which lets you take charge of your schedule and your earning potential. Your time and money aren’t controlled by anyone else.

Getting started is easy. What are you waiting for? Find out how starting an online business could help you fill your retirement saving gap.


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