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As of February 16, 2024, the IRS has issued 20,883,000 tax refunds totaling $66.98 billion. These refunds are for taxes you paid too much in 2023. The average refund paid to each taxpayer so far this year is $3,207.
Related: Complete guide to Ascent taxes
That’s a lot of money to get in bulk. The big question is what to do with it. And for many, the best answer is to invest. Here’s what happens when you put this money into a brokerage account where it can grow.
read more: We researched free tax software and compiled a list of the best options here
Benefits of investing your refund
Investing your tax refund means you don’t waste your money and your cash works for you, making you richer over time.
Putting this money into an investment account can actually have a pretty noticeable impact on your future. The table below shows how much your average payout of $3,207 could grow over time if you earned an average annual return of 10%, which is the stock market average over the past 50 years.
|
Investment years |
Resulting amount |
|---|---|
|
Five |
$5,164.91 |
|
Ten |
$8,318.13 |
|
20 |
$21,575.09 |
|
30 |
$55,960.23 |
Data source: Author calculations
It may be hard to believe that you can end up with more than half of $100,000 by simply taking this year’s return, investing it, and leaving it alone for 30 years. But that’s exactly what can happen thanks to the power of compound growth. Once your money hits the market and starts making profits, those profits are reinvested and your money grows exponentially.
What happens if you invest your tax refund every year?
Investing just this year’s tax refund can have a big impact on your net worth in the long run.But what if you invest your refund? every Year?
It’s difficult to predict exactly how much your refund will be over the decades because income and tax policies can change. But for the sake of simplicity, let’s assume you get the following: just The average refund for the foreseeable future is likewise $3,207.The table below shows what your refund was invested in every Assuming an average annual rate of return of 10%, one year is sufficient.
|
Investment years |
Resulting amount |
|---|---|
|
Five |
$26,701.87 |
|
Ten |
$64,540.58 |
|
20 |
$223,624.11 |
|
30 |
$636,245.80 |
Data source: Author calculations
Investing only the annual repayment amount can provide enough net worth for financial stability.
Should I invest my tax refund?
As you can see, there are significant financial benefits to putting your tax refund into an investment account. And for many, it may be the right choice.
Related: best tax software
However, the return on investment from saving interest on these types of high-cost debts can be higher than the actual return, so pay off high-interest debts (such as credit cards) first. You need to make sure that you are. Earn money by investing.
Also, make sure you have a sufficient emergency fund. Otherwise, you could end up in debt or having to sell your investments at the wrong time if something goes wrong.
If you have a lot of debt or don’t have an emergency fund, it’s probably smarter to use your tax refund to solve your problem. But if that’s not your situation, funneling those funds into an investment account could be the best decision you ever make.
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