Four smart moves to help maximize your tax refund in 2023
Getting a tax refund this year? Will you spend it or save it? Sandy McPeak, senior financial advisor at Wells Fargo Advisors, shares strategies for putting your money to work for you.
1. Pay down your highest-balance credit card
“Focus on chipping away at your highest-balance card, before moving on to the next one,” suggests McPeak.
“If you’re carrying a balance each month, that’s compound interest working against you. Imagine a card with a 20% annual percentage rate. There’s no guaranteed rate of return on any investment ever, let alone one that’s over 20%, so paying off a credit card that’s charging you 20% on a balance is one of the best investments you could ever make.”
2. Give yourself flexibility with a six-month cash buffer
Use your tax refund to jump-start a six-month living expenses buffer in a savings account. If you lose your job, need to care for a loved one, or are not working for any other reason, having cash ready gives you flexibility. It could help reduce the need to take the first job offered to you, sell an investment, max out a credit card, or put stress on your family. “Think of it as your ‘I’m OK if I need to take time off’ money,” suggests McPeak.
There’s no guaranteed rate of return on any investment ever, let alone one that’s over 20%, so paying off a credit card that’s charging you 20% on a balance is one of the best investments you could ever make.”Sandy McPeak Managing Director of Investments at Wells Fargo Advisors
3. Build a long-term wealth account
Put your tax refund money in a separate account, such as a brokerage account holding diversified investments, to use for long-term things that you plan to spend money on — a down payment on a house, college for your kids, or a vacation home when you retire, for example.
“Here’s where you can get saving to work for you,” McPeak points out. “You want to start early so this money has the potential to grow, and you can take some risks with it if comfortable doing so.”
For example, if you have $1,000 at an assumed 8% return on your investments, in 10 years it will be $2,225. In 20 years, it will be $4,952. “You can also get into the habit of seeing the rewards of your money growing,” she said.
4. Get a head start on next year’s taxes
“Usually, taxpayers can elect to apply a refund to next year’s tax bill,” said McPeak.
Find more helpful information in the Tax Center.
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Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.