There's nothing quite like a shiny new tax refund for sparking ideas about spending. But how about spending it to build your wealth? After all, it's often a nice chunk of change. Refunds are averaging about $2,700, according to NerdWallet's 2019 Tax Study. Here are five ways to invest your tax refund for the future:
Open an IRA or bulk up the one you have
With a Roth IRA, your after-tax money grows tax-free and, if you follow the rules, everything comes out tax-free in retirement. Plus, you can take out your contributions (but not your investment earnings) at any time, without penalty. With a traditional IRA, the big benefit is you put money in before paying taxes on it (if you qualify for that tax deduction). You don't have to pay taxes until you pull out the money.
Invest more cash into your 401(k)
A 401(k) is almost always a great place to stash extra cash. The reason it's not No. 1 on our list, though, is that you can't just throw a lump sum like a tax refund at your 401(k). Instead, it's a two-step process: First, go to your plan's website to increase your contribution rate, then stash your tax refund in your savings account to cover your expenses once your paycheck gets a bit smaller as a result of your higher savings rate.
Use a robo-adviser to help decide
The idea of choosing investments can be a bit overwhelming. That's where a robo-adviser can help. These online advisers offer a handful of diversified investment portfolios, then use computer algorithms to manage your money at a low cost. Instead of having to figure out what to invest in, you simply fill out an online questionnaire about your goals and appetite for risk, and the robo-adviser takes the reins from there.
Maybe you would rather give straightforward investing a try? It's incredibly easy to get started these days. One option is to open an account at an online broker. Many have zero account minimums and a slew of investment choices to pick from, including individual stocks and index mutual funds. Index funds are a low-cost way to invest. Another way to invest is with an investment app. Open a 529 plan for your kid
A 529 plan offers tax-free growth on your contributions. When you put your money in, you don't get a federal tax deduction on that contribution, but you won't owe taxes on your investment earnings as long as you use the money for qualified education costs. And some states offer state tax deductions for contributing to a 529.