Life Insurance

Smart Ways to Use Your Tax Refund

2020 was a year of reflection for many people. More time at home and more time with family gave us more time to think about what’s really important in life. If you’re one of the millions of people getting a tax refund, lessons from 2020 can help shape what you do with that money today. Here are some ideas to consider.

Increase your emergency savings

After all we’ve been through in 2020, adding money to your emergency fund makes a lot of sense. As a rule of thumb, your emergency fund should be equal to about six months of expenses. And it should be put in a savings vehicle that allows you quick access, like a money market account linked to a debit card.

Pay down debt

This is one of the smartest things to do with your extra money. With the average credit card interest rate hovering at just over 20%,1 be sure to pay your balances in full every month. If you have an outstanding balance, consider using your tax refund to pay it down, and then start paying cash for your purchases.

Fund a Roth IRA

The tax environment today is a big question mark. Given the amount of deficit spending by the government, chances are taxes will be going up in the future. To take advantage of today’s lower tax environment, consider using your refund to contribute to a Roth IRA, where you pay taxes today and not in retirement.

Depending on your situation, it might be wise to convert some of your traditional IRA money to a Roth IRA, again paying taxes on it today, and not when you use it in retirement.

Start a business

Working from home may have grown on you. Maybe you’ve had time to discover a passion that could turn into a small business or a gig job. Use your tax refund to jump-start that idea, or just use it to improve your home office space or technology.

Renovate your home

If you spend a lot of time at home, maybe it’s time for a remodel. Your home is still one of your best investments, and making improvements to any area can increase its value. Or if you’re thinking bigger, maybe you can use your tax return to help invest in a rental property.

Buy life insurance

If 2020 taught us anything, it’s that life is fragile. Because of life’s uncertainties, you may want to protect yourself and your family. If you have life insurance, now is a good time to review what you have and make sure it’s up to date. If you don’t have life insurance, you should seriously consider putting some of your tax refund into a policy to protect your family.

Give it away

If you’re in a good place financially, you may want to give some or all of your tax refund to a charity or person who can use it more than you. Consider donating to a food bank, a relief fund or another charity. And contributing gives you an added benefit. Research has shown that people who donate to charity have lower levels of stress and blood pressure.2

Invest in you

In challenging times, such as the COVID-19 pandemic, some people have had to rethink their careers. Maybe you’re one of them. You may want to consider applying a portion of your tax refund to find ways to reimagine your career. Common approaches for this may involve signing up for coursework to explore a new field, taking on consulting projects or building your professional network.

Regardless of how you plan to use your tax refund, you should consider working with a financial professional. In today’s world, you really need the help of a trusted financial professional who can answer your questions, provide meaningful guidance and help you put a plan in place for your short- and long-term goals. If you’d like to learn more about how Penn Mutual can help you reach your goals, reach out to one of our financial professionals.

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This post is for informational purposes only and should not be considered as specific financial, legal or tax advice. Depending on your individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. Always consult your legal or tax professionals for specific information regarding your individual situation. Accessing cash value will reduce the policy death benefit and may require an additional premium to keep the policy in force.


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