The Best Ways to Invest Your Tax Refund in 2024
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Getting a tax refund can be exhilarating. Receiving that lump sum of your own money that was swept away by the IRS is the closest thing most people will get to finding an envelope of cash on the sidewalk.
According to the IRS, so far in 2024, the average tax refund is about $3,100, a slight increase from last year. That’s a pretty good windfall, and making the most of it is important. However, many Americans are uncertain of how to use those funds once they're refunded.
Instead of blowing the good fortune on new shoes or a seven-leg parlay, they should instead consider boosting their investment portfolio. But how should you be using your refund to help reach your financial goals? The answer will depend on what your goals are — and how soon you might need to use the money you're investing and trying to grow. Here are some things to think about.
Best ways to invest your tax refund for one year
If you’re looking to invest your tax refund with a one-year timeline, you might think the stock market is the answer. But if your goal is to grow those funds for one year and apply them to a large purchase like a home or vehicle, the stock market could present too much risk.
“If someone came to me with their tax refund and said I want to invest it for one year, it would be bills,” says Jamie Cox, managing partner for financial planner Harris Financial Group. “Either Treasury bills or some fixed-income instrument.”
The reason for this is twofold. As Cox explains, these types of investments are doing exceptionally well right now. Because of the Federal Reserve’s interest rate policies, the yields on investments like Treasury bills or certificates of deposit are higher than they have been in decades — many CDs and Treasury bills remain above 5% APY.
Locking in these rates sooner than later is a good idea given how they won’t last forever. With the Fed preparing to lower rates after halting them almost nine months ago, these products’ yields will certainly go down when the central bank decides to act. This may be the last chance investors have to take advantage of returns that may not be seen for a long time, assuming the Fed’s policies go according to plan.
The second reason for investors to favor CDs or Treasury bills as short-term investments is because they provide a level of safety not afforded by stocks. The stock market is off to a strong start in 2024, with the S&P 500 index gaining over 10% so far and the Nasdaq returning 11% through the first quarter. However, there is always a chance of market volatility, especially over the course of the year. Rate cuts occurring too quickly could send inflation levels back up, but cutting too slowly could trigger a recession.
Both of these scenarios could have adverse effects on the stock market. With the Fed balancing on a razor’s edge, fixed-income investments like CDs and Treasury bills provide investors with more peace of mind, given their fixed terms, guaranteed yields and backing by the FDIC and the full credit of the federal government.
And while there are other safety-rated options, one thing Cox says he would avoid are variable-rate instruments like money market accounts. These products allow banks and credit unions to adjust APYs at will without giving account holders notice, meaning you could put your tax refund into an account currently yielding 5%, but that yield could be lowered significantly.
Best ways to invest your tax refund for the medium-to-long term
For those looking to turn their tax refunds into an investment opportunity over a longer horizon, there is more leeway for volatility, making the stock market the best place to put your money.
Depending on whether you’re planning on investing the money for just a few years, or if you’re looking to set it and forget it entirely, weighing account types more than the investments themselves is important. For example, somebody with a two- or three-year timeline might consider investing their tax refund in a standard brokerage account. But an investor looking to invest for 10 or more years might want to consider opening a tax-advantaged account like a Roth IRA.
“That way you can maximize the tax deferral in the Roth, and you can always pull your basis back out of the contributory Roth,” says Cox. “You just have to leave the earnings in for the five years or until 59 and a half [years of age].”
As for the assets themselves, Cox advises toward investing in index funds. “Any investing beyond one year where you don’t have any immediate liquidity needs, I would say [to invest in] the Total World Stock Index,” offers Cox.
Index funds like the SPDR S&P 500 ETF Trust (SPY) or the Vanguard Total World Stock Index Fund (VTWAX) are going to be the standard for multiyear investing. However, unlike the SPY, which tracks the S&P 500, or the Nasdaq 100 ETF (NDQ), which tracks the top 100 companies trading on the Nasdaq, the VTWAX includes large-, mid- and small-cap companies from around the world.
Index funds are safer than individual stocks since they aim to return the market average by spreading funds across a pool of companies, thereby increasing diversification while minimizing risk exposure. Younger or more aggressive investors might prefer the higher growth potential of individual equities, though.
Emerging industries like artificial intelligence or broader tech investing are commonly advised investment strategies in this scenario, given how the mega-cap companies — those with market capitalizations in excess of $200 billion — that make up Big Tech account for the vast majority of the largest stock indexes by weighting.
Pay off debt before investing your tax refund
While not necessarily an investment, a significant tax refund can be used to get out of debt, or at least to lessen it. The average tax refund may be over $3,000 this year, but about 20% of all American taxpayers have credit card debt between $10,000 and $20,000. Moreover, 35% have a credit card APR over 20%. That doesn’t begin to factor in other kinds of debt, either, like student loans, car loans or medical debt.
Cox explains the importance of paying down debt before investing in simple terms: “If you have $3,000 in credit card [debt] at 20%, you'll never earn that in the market in perpetuity.”
Indeed, at that rate, your investing account would need to yield at least 20% annually in order to just break even with your credit card company’s interest charges. If you have any substantive amount of debt, you’re actually losing money by investing it rather than paying down the debt first.
Considerations for next year’s income taxes
One final important consideration is that your tax refund doesn’t have to be so big each year. If you’re getting a larger tax refund, it often means you’re over-withholding money from your paycheck. This isn’t always the case as taxpayers who qualify for the earned income tax credit or other tax credit are receiving a payment rather than a refund.
For those who are simply overpaying their taxes, it might feel good to get a big deposit around tax season. But remember that it was always your money, which you could’ve been putting to work already.
“If you're just over-withheld, you probably should just allocate more of your current year's income to your 401(k),” says Cox. “Instead of getting refunds, you could instead adjust your withholdings outward and adjust your 401(k) contributions upward.”
Gina Bolvin, president of Bolvin Wealth Management Group, offers similar advice. “One of the best ways to invest your tax refund is to get a head start on 2024 tax returns,” Bolvin says. “Most investors wait until the tax filing deadline to contribute to a Roth or contributory IRA, but your money could work harder if you contributed to an IRA in January for the current year.”
To illustrate, making a contribution in January 2024 to a Roth IRA instead of contributing at the tax deadline in April 2025 gives your money an extra 14 months to grow. “Over time, say 10 years, this would add up to an additional 12 years of investing,” Bolvin says.
These are small adjustments that you can take ahead of time to give your money more room to grow than by waiting for a lump sum in your refund. “Why allow the government to keep your money interest-free for a year?” asks Cox. “If your income isn't going to change, you can change your W-4 withholding to appropriately match what you're making and instead put that money into your 401(k). You're going to get the most horsepower that way.”
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