It's Tax Season: Here Are 5 Ways to Save Your Refund
You may be tempted to splurge on new furniture or a dream vacation when you get your tax refund. But you may get more bang for your buck by saving your refund instead.
Where should you put your tax refund if you're planning to save? Here are five options to consider:
1. Online Savings Account
A savings account is an ideal choice for parking your tax refund for short-term needs, such as an emergency fund. Your money is safe, easily accessible and it grows as it earns interest.
You could open a savings account for your tax refund at a traditional bank, but there are some great reasons to consider an online savings account instead.
You may pay lower or no fees for an online savings account and earn a better annual percentage yield on your money.
The Barclays Online Savings Account, for example, currently offers 2.20 percent APY, which is 24 times the national average. There's no monthly maintenance fee and no minimum opening deposit requirement, so it doesn't matter how much your refund totals. Plus, tools like the Savings Assistant calculator can help you set and reach your savings goals.
2. Online CD Accounts
A certificate of deposit or CD account works a little differently, compared to a savings account. CDs are time deposits, which means you commit to saving your money for a set period of time. Once the CD matures, you can withdraw your original deposit and any interest you've earned.
Similar to savings accounts, you'll often find the most attractive CD accounts online. Barclays offers online CDs with competitive rates — currently you can earn a 3.10 percent APY with a 60-month CD. There are no monthly fees or minimum balance to open a Barclays CD.
A CD could be a good fit for saving your tax refund if you don't plan on using the money right away. If you want some flexibility with your savings, you can set up a CD ladder, which includes multiple CDs with different maturity dates. Spreading out CDs means a maturity date is always on the horizon, so you can withdraw your savings if necessary.
3. Individual Retirement Account
If you're looking to create a retirement savings account or add to one, you can use your tax refund to help. Individual retirement accounts or IRAs can offer multiple tax benefits as you build a nest egg for the future.
A traditional IRA allows for tax-deductible contributions, with withdrawals taxed at your ordinary income tax rate in retirement. You might prefer a traditional IRA if you're in a higher tax bracket now and you're looking for extra deductions to reduce your taxable income.
A Roth IRA, on the other hand, doesn't give you a deduction for contributions but you can make qualified withdrawals tax-free in retirement. Unlike a traditional IRA, you're not required to begin taking money from a Roth IRA at age 70 ½, so you can keep adding to it as long as you're working.
4. Health Savings Account
If you're enrolled in a high deductible health plan, you may have access to a Health Savings Account (HSA). An HSA is a tax-advantaged way to save for health care expenses. Contributions are tax-deductible, your savings grow tax-deferred and withdrawals are tax-free if they're used for qualified medical expenses.
Funneling some of your tax refund into an HSA could make sense if you're already putting money away in an online savings account, online CD or IRA. One advantage of an HSA is that once you turn 65, you can take money out of the account for any reason without a tax penalty. You'll just pay income tax on the withdrawal.
5. College Savings Account
It's no secret that college costs have skyrocketed, and if you have kids who will one day be college-bound, it pays to jumpstart your savings for their education. Using your tax refund to open a 529 college savings account or a Coverdell Education Savings Account (ESA) can help you start preparing for any future tuition bills.
Both accounts offer tax benefits, in that withdrawals are tax-free when you use them to pay for qualified education expenses. Every state offers at least one 529 account, and you can save in any state's plan. Coverdell accounts allow you to save up to $2,000 per year until your child turns 18.
Regardless of where you decide to save your tax refund, do your homework. Be clear on your goals for the funds, how much interest you can earn and what fees, if any, you will pay.
All content provided in this blog is supplied by Rebecca Lake and is for informational purposes only. Barclays makes no representations as to the accuracy or completeness of any information contained in the blog or found by following any link within this blog.