Invest your tax refund or send it to me! It is all about choices. What are you going to do? I know some will pay down debt, add to savings or fund an IRA. If you are going to go out and spend it on dinner, clothes, electronic toys or something that will break, wear out or finished in an hour, you can always send it to me! What choice will you make?
Remember a tax refund is a return of your money that you had withheld from your paycheck. When you fill out your W4 for withholding it is not specific to your personal circumstances. It is a universal form for all taxpayers. If you earnings are similar each year, then you should adjust your withholding to match your tax liability. To play it safe, try to create a small refund (less than $50). That is equally true for state income tax as well. If you receive large refunds every year, either you like the forced savings or you do not mind that you are providing an interest free loan to the government.
Okay, you adjusted your withholding to reduce the size of the refund, what should you do with the money? Whether you are paid weekly/biweekly/semimonthly/monthly, you can invest your money in stocks, bonds, mutual funds, collectibles, antiques, commodities or real estate. You are looking toward the future and making choices. Someday, you want to retire or start a business. No matter what you want to do, you can do something with that money that will help you get there. What am I suggesting?
Personal finance experts talk about multiple income streams almost as often as asset allocation when it comes to investing. In retirement or your later years, you want multiple income streams because you want to make sure you have income. Retirement may mean a pension, stocks, Social Security, IRA, or Roth IRA. If you are already contributing to your 401K and other tax deferred investments, maybe you should think about a brokerage account. Why? Investments, outside a tax deferred account are taxed at capital gains rates!
Some may say that the capital gains tax may change in the future. I do not know, but I think the risk is worth it. I want an additional income stream that is taxed at a lower rate than ordinary income. Similar to an asset allocation, I want to have a diverse income stream to make sure that I do not run out of money in retirement. In retirement, I want the choice of withdrawing less from my IRA and use funds that have a lower tax rate. I invest in a Roth IRA, although I do not think I will be in a higher tax bracket in retirement.
I invest in a Roth IRA because I want the choice to either take the money tax free or I can leave in to my heirs. Choices are the basis for investing and you should give yourself as many choices as possible. Your investment in a brokerage account can be tax efficient, or for growth, it is your choice! Just think if you bought fifty shares of Apple when the share price was $60. It would be tax efficient because there are no dividends currently. Your $3,000 investment would be worth more than $20,000 today.
That is just one example! You could add to your savings to invest in rental properties and it too would be subject to capital gains tax. The more income streams you can accumulate, the better off you are. What should you do? You should max out your 401K, IRA, Roth IRA and start a brokerage account! If you do, you just added another income stream for your future. What do you think you should do? You can invest your tax refund or send it to me!
Photo by: DonkeyHotey
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You can invest your tax refund or send it to me!