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With less than a month before the federal tax deadline, the average refund is more than $3,000, according to the latest data.
A typical taxpayer has received a rebate of $3,145 so far this season, up 5.8 percent from the previous year, according to Internal Revenue Service figures through March 8.
A refund is money you overpaid to the IRS through payroll deductions, which the agency holds until you file your tax return.
Experts warn that while the money may seem like a windfall, it’s essentially funds you missed during the year.
This means that when you receive it, it is essential that you spend it wisely. Here are five ways to use it wisely.
According to the latest statistics as of March 8, the typical taxpayer received a rebate of $3,145 this season, an increase of 5.8% from the previous year.
Pay off high-interest debt
Paying off high-interest debt is one way to use repayment to improve your overall financial situation.
“Credit card debt should be at the top of the list because about half of credit card holders are in debt from month to month and the average credit card rate is record high,” said Ted Rossman, senior analyst at sector at Bankrate.
Credit card debt should be at the top of the list, said Ted Rossman, senior industry analyst at Bankrate.
According to LendingTree, the average credit card interest rate in the United States is over 24%. At the end of last year, Americans held $1.13 trillion on their credit cards.
Keyana Russ, financial planner at Four Ponds Financial Planning, said CNN that people don’t always record how much they pay in interest over time.
“What I usually see is people paying the minimum, or charging for everyday expenses and not paying the bill at the end of the month,” she said.
For example, if you have a balance of $3,000 with an interest rate of 27% and you only pay the required minimum of $97.50 each month, it will take you 240 months (or 20 years) to pay off. repay, according to Bankrate’s calculator.
You will also have paid an additional $3,044.57 in interest.
Add to Savings
More than half of Americans don’t have enough savings to cover an unexpected $1,000 expense, a striking Bankrate survey found earlier this year.
Experts recommend putting the repayment into a high-yield savings account.
The best interest rates are generally offered by online banks.
While the national average yield on a traditional savings account is just 0.46% in 2024, according to the Federal Deposit Insurance Corporation (FDIC), many high-yield savings accounts offer rates of 4 or 5%.
For example, if an average repayment of $3,000 was placed in a high-yield account with 5% interest, it would earn $150 per year.
Make a mortgage payment
If you’re not saddled with credit card debt but have a high-rate mortgage, you might consider making an extra payment on the loan.
The average 30-year fixed mortgage rate is 6.74%, according to the latest figures from government-backed lender Freddie Mac, but approached 8% in the second half of 2023.
Making an extra payment or two “can make a long-term difference to your principal,” Russ told CNN.
A Roth plan is funded with after-tax money that you can withdraw tax-free once you reach retirement age.
Invest in a Roth IRA
In 2024, you can contribute up to $7,000 in after-tax savings to a Roth individual retirement account (IRA). This amount increases to $8,000 for those over 50.
This money will then grow tax-free until retirement, when you can make penalty-free withdrawals after age 59½.
This is comparable to a traditional IRA, where you get a tax break up front and pay no taxes on the money until you withdraw it in retirement.
Contribute to a 401(K) to Get an Employer Match
Eric Bronnenkant, head of tax at Betterment, told CNN that Americans should consider putting their refund towards contributing enough to their 401(K) to get a full match from their employer.
Employer matching your 401(K) means your employer contributes a certain amount to your retirement savings plan based on the amount you contribute each year.
Depending on the specific rules of your employer’s plan, they could match a percentage of your contributions up to a portion of your salary, or sometimes up to a certain dollar amount.
If you receive $3,000 in return, Bronnenkant said, you can put that money into a high-yield savings account to earn interest.
Then, on your workplace 401(K) site, you can change your salary contribution so that you’ll have added $3,000 more in pre-tax funds by the end of the year than you would otherwise. ‘would have done otherwise.
For example, if you are paid biweekly and have 20 extra paychecks until the end of the year, you can increase your biweekly contributions by $150 per paycheck to get the refund amount of $3,000.