Each year, Americans afford the government interest-free loans averaging $2,000 per taxpayer. Commonly referred to as income tax refunds when these loans are repaid, many people tend to look upon that cash as windfalls. However, it is better to consider it income and employ it accordingly. With that in mind, the experts here at Yieldstreet suggest these five ideas for investing tax returns.
The average APR (annual percentage rate) on credit card debt tops 20%, according to the credit reporting agency Experian. Therefore, one of the smartest investments for a tax refund is paying off as much credit card debt as possible. Given that the average stock market return is roughly 10% annually, paying off credit card debt will ultimately be more valuable than a stock market investment to a household’s finances.
Having an emergency fund of three to six months set aside can be useful should an unanticipated job layoff, sudden medical emergency, or an unexpected home or auto repair come up. Yes, these concerns could be addressed with credit cards. However, the resulting debt would make a bad situation even worse. A smart play here would be to keep the funds in a high-yield savings account offering ready liquidity.
Assuming no credit card debt and the existence of an adequate balance in an emergency account, funding an individual retirement account (IRA) can help ensure adequate retirement income. A traditional IRA allows the money to be put away without incurring additional taxes until it is disbursed. A Roth IRA will tax the money as it is put into the account, but shield it from additional taxes when it is disbursed.
Being less connected to public equity, real estate operates largely independent of the stock market. It can also be a good way to build generational wealth. Moreover, its proceeds are subject to the passive income tax rate, which is lower than that of earned income. Even better, there are many ways to invest in real estate without owning or managing property.
Art investments have returned an average of 14% over the last two and half decades. This bests the S&P 500’s returns by nearly five percent. Art can serve as a hedge against inflation, add diversification, and potentially reduce portfolio volatility, given its typically low correlation to the stock market. Moreover, one can invest in an art fund without attaining qualified purchaser status by taking a fractional ownership position.
Paying off high interest debt, establishing an emergency fund and investing for future needs are five of the smartest ideas for investing tax returns. While the temptation to look upon those dollars as a windfall and splurge might be great, it is better to think in terms of long-term needs rather than short-term gratification.
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