By Carolyn Hall McMahon and Melanie Kwon Duch, Innovation Strategists at D2D Fund
Most of us have lots of ideas for how to spend our tax returns – pay down that looming credit card debt, squirrel some away for retirement, treat yourself to a new flatscreen or handbag. But balancing long term aspirations and resolutions against short term gifts and splurges can be tricky.
By the time that refund sum hits our accounts, it can be easy to forget our New Year’s savings resolutions and use our return to meet those short-term needs and wants. One easy way to avoid falling into this trap is to designate a portion of your return to savings on the day you’re filing your tax return!
First, sit down and make a plan for how you want to allocate your refund (some suggestions for savvy allocation can be found on the blog here). Then, while preparing your taxes, use Form 8888 to direct your return into up to three different accounts. For example, you could allocate 1/3 of your return to your IRA, 1/3 into your savings account, and 1/3 into your checking account. All you need are routing and account numbers ready when you begin to file. Splitting your return will not delay receipt of your refund and is an easy way to work toward your long-term goals and still enjoy the benefits of a little cash on hand.
Tired of earning little or no interest on your savings account? Looking for a safe place to invest some of your money? Start this tax season! You can use some or all of your refund to purchase Series I U.S. Savings bonds simply by ticking a box on your return. If the thought of savings bonds conjures up images of dusty gifts from grandma languishing in a drawer somewhere, consider this: bonds offer competitive, modern features. They are inflation protected, meaning they earn a guaranteed interest rate no lower than the current rate of inflation (and oftentimes much higher), and you can purchase them for as little as $50.It is no wonder finance professor and pension expert Zvi Bodie recently called Series I Bonds “the safest way for Americans to invest their money in the long run.”
Missed a niece’s birthday? Looking for a graduation gift that feels more meaningful than an online giftcard? Help someone kickstart their saving and investing this year by gifting them a savings bond. When you’re splitting up your return, write the name of the person you’d like to give the gift to directly onto Form 8888. This will make them the official owners of the bonds. You’ll receive these personalized paper savings bonds in the mail, ready to be slipped into an awaiting birthday card or graduation envelope. The bonds are especially good gifts for the future students in your life. If bonds are used to pay for educational expenses like tuition and fees, it’s possible to exclude their interest earnings from taxable income.
Just in case you needed an extra nudge to try out splitting, investing, or gifting, this year trying just one of these new habits could make you the winner of $25,000! Any tax filer, aged 18 or older who uses Form 8888 to save just $50 of their tax refund can enter the SaveYourRefund promotion for a chance to win 100 weekly $100 prizes and a grand prize of $25,000. Taxes can feel hard and thankless, enjoy a little fun and reward this tax season instead!