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An exciting time for many families is right around the corner… March Madness! Ok, not everyone is as crazy about college hoops as I am. Families around the country are excited because they recently received, or are expecting, an income tax refund. Last year, over 111 million income tax refunds were paid out by the IRS. The average tax refund last year was $2,860.

If you’re expecting a refund, you didn’t hit the lotto. Tax refunds are simply a check that you receive because you overpaid on your taxes that year. When you get hired, you fill out a W-4 form. This form asks you to claim “allowances” for the purpose of withholding taxes. The more allowances you claim, the less money will be withheld to cover taxes. When filing your taxes, if you overpaid, you’ll get the excess back as a tax refund (or you can earmark it for future tax bills).

Last year, over $317 billion was paid back in the form of tax refunds. Some families adjust their W-4s so that they withhold less money for taxes as they get paid. This can result in owing money to the IRS because they underpaid on taxes. For others though, tax refunds are looked forward to each year as a sort of “bonus” in which they get an influx of capital. With this much money flowing around over the next several weeks, it’s important to make sure that you are using this money wisely. Here are 13 great ways to use your income tax refund this year.

Build Up an Emergency Fund

Recent statistics on emergency funds are troubling. 66 million Americans have zero dollars saved for an emergency. 47 percent of Americans say that they cannot afford a $400 unexpected expense. Without an emergency fund, these individuals need to charge the expense on a credit card, sell something to get the money, or borrow from someone else.

This is the place to start this year if you get a tax refund. Set a goal of one month’s worth of cash that could fully cover your expenses. Once you have a month, start building up from there. Your end goal should be to have 3-6 months worth of expenses saved. Again, this is an emergency fund. This should not be an account that you use every day. I would recommend holding this money in a savings account outside of your normal institution. Online savings accounts are a good place to hold your emergency funds. They often offer better interest rates than your brick and mortar banks.

Pay Down Credit Card Balances

Outstanding credit card debt topped $1 trillion at the end of 2016. That’s trillion with a T, y’all. That is a scary number. The average household that has debt owes over $16,000 on credit cards. To make matters worse, the average interest rate on credit cards is up to 19.36%. Many families pay the minimum payment each month and “kick the can down the road”. Don’t do it! If you get a tax refund and you have a balance on your credit cards, pay them down. The longer you put off putting a dent in the balances of your cards, the harder it will be to pay them off completely.

There are some great tools out there to help you on your journey to pay down debt. Ready for Zero is a free app that helps you create a plan and also shows you your debt-free date to help you keep your eye on the prize. Pay Off Debt is an app that helps you use the “debt snowball method” to pay down your debts. It helps you organize and pay off your debts using the cheapest and fastest way possible. Both are great options if you need some help with debt repayment.

Pay Down Student Loans

Once you have an emergency fund in place and you have paid down credit cards, it’s time to focus on student loans. Don’t pay ahead on student loans if you have credit card balances. Your interest rate on your student loans should be a third (or less) than that of your credit cards.

The average 2016 graduate will have over $37,000 in student loan debt. Borrowers often do not fully comprehend the magnitude of repayment when they take these loans. With interest rates normally between 4-7%, you need to have a repayment strategy when you graduate.

Use your tax refund to pay down your student loans. If you are making the minimum payments, you know that it can feel like you’re on a hamster wheel. Paying down your principal with some sizeable payments will make a huge difference.

Fund an IRA

Fewer than 7 in 10 workers report having saved for retirement. Many workers have retirement plans available to them through work. However, many do not. Either way, an IRA is a great way to save for your financial future. I encourage clients to save a minimum of 10% of their gross wages towards retirement. Ideally, that figure would be closer to 20%, but 10% is a great start. There are two types of IRAs that you should know.

Traditional IRA

The money you invest in a Traditional IRA lowers your taxable income for that year. You actually have until the tax filing deadline of the next year to make contributions to an IRA. For instance, this year you have until April 18th to make IRA contributions for 2016. The maximum you can contribute is $5,500 if under age 50 and $6,500 if over 50. Note: Your deductibility may be limited if you or your spouse are covered under a work retirement plan or if your income exceeds certain levels. There are withdrawal rules when you wish to use your funds.

Roth IRA

The amounts that you are allowed to contribute are the same for Roth IRAs as they are for Traditional IRAs. However, in a Roth IRA the amount you contribute does not lower your taxable income. The money you invest is after-tax, meaning you already paid taxes on it when you were paid through your employer, so you can’t be taxed on it again. As long as you use your Roth IRA for a qualified distribution, your withdrawal is 100% tax-free. Therein lies the power of a Roth IRA. Let’s say you invest $50,000 in your Roth IRA over 20 years. With investment returns, your account grows to $250,000. Your qualified distributions will be 100% tax-free.

Set Yourself Up on a Budget

If you aren’t currently using a budget, listen to Bruce Buffer: “IT’S TIME!”

Check out these stats:

  • Just 32% of American households keep a budget
  • 76% of Americans live paycheck to paycheck
  • 25% of Americans that make over $100,000 live paycheck to paycheck

The foundation of a sound financial plan starts with managing cash flow. If you are spending more than you’re bringing in, nothing good will come of it. It’s time to get serious about setting up a budget. Use your tax refund money to set yourself up with a budgeting app or software to help you. Most are available for ridiculously cheap. Some are free, so use one to make sure that you don’t squander your tax refund. A few good options… is really cool. Mint connects to your bank accounts to easily track your spending and create a budget. It will alert you to peculiar charges and will send you customized tips based on your spending. You can also use Mint to track and pay your bills all in one place.

YNAB, or “You Need a Budget” is another great option. YNAB encourages you to give every dollar you spend a plan. It will also allow you to set up goals. Thus, you can start building up some savings and track your progress. YNAB is $5 a month but it is well worth the small fee to build an airtight budget.

Engage in Financial Planning

“A goal without a plan is just a wish.” – Antoine de Saint-Exupéry

Simply writing down a goal makes you 42% more likely to accomplish it. It’s great to strive for financial independence. But how can you make it a reality? You need to engage in a financial planning relationship. A financial planning relationship can often be initiated for less than what you pay each year for a gym membership. Start taking your financial future seriously.

Financial Planning will help you be prepared for every life transition that comes your way. Life transitions (i.e. marriage, becoming parents, retirement, etc.) often come with important financial decisions. Too often I find people don’t have a plan and hastily make a decision that ends up sabotaging their long-term success.

Most families spend more time planning out their yearly vacation than they do planning for their financial future. This is frightening. Take your personal finances seriously this year and set yourself up with a strong plan. The most important result of planning is how it makes you feel. Don’t you want to be confident knowing that you have done everything possible to set yourself up to live your best financial life?

Interested in learning more? Let’s chat!

Get Your Estate Plan in Order

According to LexisNexis, 55% of American adults do not have a will or estate plan in place. To me, this is the most neglected aspect of financial planning. I find that most families don’t get their estate planning in order until they have a negative experience due to a family member not having any.

Having estate planning in order can make a time of grief for your family more manageable. Imagine that you, and your spouse if you are married, pass away in an unforeseen accident. Dark, I know, but hear me out. Your family will now have to figure out what to do with your estate. Do you have children? Without guardianship language in your estate plan, the state will decide who takes care of them. Do you have some assets? If your children are minors, they cannot inherit those assets. The state will appoint someone to make those financial decisions. Oh, and don’t think for a second that this is a free service.

It’s time to get your estate plan figured out. Save your family from the added anguish of making difficult decisions on your behalf. Go see an estate planning attorney and get your ducks in a row. It’ll likely cost you anywhere from $800-2500 but it is absolutely essential.

For more: What Families Need but Often Neglect

Protect Yourself

Insurance is extremely important to your wealth building efforts. Insurance protects your wealth. We know that we need car insurance and homeowner’s insurance, but what else? Here are some other policies that you should be considering…

Life Insurance

Everyone has a different idea of what they want their life insurance to cover. For some, it is to cover their remaining mortgage. For others, fully funding their children’s college expenses or funding a spouse’s retirement expenses. It is important that you have a needs analysis done so that you can see if you have enough -or too much- life insurance in place. It’s also prudent to make sure it is cost-efficient. Are you confident that your life insurance will take care of your family if you were to unexpectedly pass away?

Disability Insurance

The biggest threat to many families is a sudden loss of income. The first buffer would be your emergency fund. However, what if you were unable to work for 6 months? A year? Longer? Disability insurance can help you protect your family’s income in case something happens to you and you can no longer provide financially.

Umbrella Liability Insurance

There are three ways that most Americans think they will become wealthy.

  1. Hitting the lotto. Good luck with that!
  2. Inheritance. We are in the midst of the biggest wealth transfer ever in this country.
  3. SUING. That’s right, good old-fashioned litigation.

If you have substantial retirement assets, a teenage driver, or a pool, you might be someone else’s golden ticket. Don’t put your financial future at risk. An umbrella liability policy acts as a buffer in the instance that you get sued. The policy will be paid out before your personal assets have to satisfy the lawsuit. You can often insure yourself for a million dollars for around $200 a year. This is a must-do for any wealthy family.

For more: Protect Yourself Before You Wreck Yourself

Long-Term Care Insurance

Long-term care insurance will cover long-term services and support for extending medical needs. These can be in-home or in-facility services. A few statistics on LTC

  • At least 70% of those over age 65 will need long-term care services or support at some point in their lives
  • The average length of a nursing home stay is over two years


As you can see, it is extremely expensive. Scary stuff.

With the influx in cash from your tax refund, consider looking into your insurance program. Protect your family and your assets from the unexpected.

Fund a 529 Plan

We already discussed the ungodly amount of student loan debt in this country. Avoid this by getting out in front of it. Consider funding a 529 plan to help cover college expenses for yourself or your children. The average cost for an in-state public college is over $24,000. Double that if you’re looking at a private school. With those costs continuing to rise, funding a 529 plan early and often can pay dividends in the long-run.

Money invested in a 529 plan grows tax-free and can be used tax-free for qualified educational expenses. Qualified expenses include tuition, room and board, books, and computers. For an added benefit, many states include a state tax incentive to use your state’s plan. Look into your state’s plan and start saving for future educational expenses today.

For more: 529 Plan Benefits That You Need To Know – But are Unaware Of

Fund an HSA

Enrollment in HSAs (health savings accounts) have increased by over 50% since 2013. Many employers are making the move over to these high-deductible plans. Some employers may offer a specific HSA investment account for you to invest in. If not, you can seek out your own option. The amount you contribute lowers your taxable income for that year. Contribution limits from

If you use your HSA account to pay for qualified medical expenses, your growth and withdrawals are 100% tax-free. I would encourage you to leave at least a full year’s deductible in cash and invest anything on top of that more aggressively.

Two HUGE lesser-known benefits to investing in an HSA:

  • After age 65, you can use this money for any expense that you choose. So in essence, this account acted like an IRA. If you have a large account and don’t end up needing it for health expenses, use it for something else. You will pay income tax on the withdrawals, like you would with a Traditional IRA.
  • You can use the account to pay for long-term care insurance premiums. We already discussed just how expensive long-term care is. Long-term care insurance is also very expensive. You can use this account to pay the premiums for this care.

Already have the 10 items above well taken care of? Consider the following…

Update Your Home

Do you have a home improvement project you’ve been waiting to get done? An influx of cash from a tax refund could fund that project. Get those new countertops or finish off your man cave. Are you looking to boost your home’s value for a potential sale? The kitchen is king. Next up should be bathrooms. Putting some money into sprucing up your kitchen and/or bathrooms could increase the value of your home by 10% or more.

Invest in Yourself

Put some money into bettering yourself. Whether you want to increase your earning potential with new skills, or want to expand your knowledge by reading more, investing in yourself is always a good idea. I’m personally a big fan of reading (have a book suggestion? I’d love to hear it in the comments below).

If you take a class, you may be eligible to use the Lifetime Learning Credit. There are some income limits so look into your eligibility for this credit.

Looking for a book relating to personal finance? I’d suggest The Richest Man in Babylon. It is a book of parables that will inspire you to build wealth, be thrifty, and introduce you to financial planning principles. Another great option is The Millionaire Next Door. This book will show you how first generation wealthy families built and maintained their wealth. It is also inspiring. You don’t have to make six-figures to build serious wealth.

Do Something Fun

I’m not a scrooge, ok!? Go out and have some fun. What is the purpose of building wealth if we aren’t using it to get the most out of life? Buy a boat. Go on vacation. Get a new TV. Go experience somewhere beautiful. Just don’t do it if your financial house isn’t in order first.


There you have it! Use this is a guide to make wise decisions this year with your income tax refund. Have any other ideas? Shoot ’em my way!

Securities America and its representatives do not provide tax advice; therefore it is important to coordinate with your tax advisor regarding your specific situation.
Nick Vail is a co-founder and independent financial advisor with Integrity Wealth Advisors in Indianapolis. He started Remove The Guesswork to empower people to stop guessing when it comes to their finances and to start PLANNING. You can learn more about him here. Are you interested in working with Nick?
By | 2017-03-02T15:02:34+00:00 March 2nd, 2017|Categories: Financial Planning|Tags: , |0 Comments

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