I’m a Financial Advisor: 4 Best Ways To Use Your Tax Refund to Build Wealth
Written by
Andrew Lisa
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A tax refund is nothing more than the repayment of an interest-free loan you gave to the IRS without meaning to. Most experts suggest adjusting your paycheck withholdings so that you don’t get a refund and instead have access to your money to invest or save. But even so, it’s the biggest windfall many households will receive all year — and it presents a golden opportunity to turn a little bit of money into a lot.
According to a new GOBankingRates survey of more than 1,000 adults, nearly two out of three people expect a tax refund in 2024. Among those who do, half anticipate a refund of more than $1,000.
Here’s how one expert suggests using an IRS refund to build long-term wealth.
Meet the Expert
David Brillant, the founder of Brillant Law Firm, is a specialist in estate planning, trust, and probate law certified by the State Bar of California Board of Legal Specialization. After receiving a law degree from Golden Gate University School of Law, he earned a supplementary master of laws advanced post-graduate degree in taxation.
He’s guided and advised trustees and clients on financial topics ranging from taxation to real estate to estate planning.
He suggests the following strategies for using a tax refund to build wealth and financial security.
Put It in a Roth IRA
It’s common knowledge that diversified and cost-effective stock investments like index funds and ETFs can put wealth-building on autopilot if held for the long term — but the type of account you hold it in can make all the difference in how much wealth you build.
“One way to leverage a tax refund is by contributing to a Roth IRA,” said Brillant. “Given the tax-free growth and withdrawals in retirement, a Roth IRA can be an excellent wealth-building tool.”
Brillant alludes to the fact that unlike 401(k)s and traditional IRAs, you contribute to Roth IRAs on an after-tax basis, which means you can withdraw both your contributions and gains tax-free after age 59 1/2. If you need to access your funds before that, you can pull from your contributions — but not your gains — without an early withdrawal penalty. That kind of flexibility makes for a versatile and powerful investment vehicle, and a little now can grow into a lot for later.
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“My experiences have shown that clients who strategically use their tax refunds to fund Roth IRAs often build a more substantial tax-free nest egg for retirement, providing financial security and flexibility,” said Brillant.
However, most people will never reap the benefits. Fewer than 5% of the people who responded to the GOBankingRates study said they plan to invest their refunds.
Start a College Fund
As a tax specialist, Brillant naturally gravitates toward vehicles that keep money out of the IRS’s coffers. One of the most effective account types not only avoids plunder by the taxman but can also prevent years or decades of student debt, which is one of the most burdensome barriers to wealth-building in America.
“Another effective strategy is to invest your tax refund into a tax-advantaged college savings plan, such as a 529 plan,” he said. “Not only do these plans offer tax-free growth and withdrawals for qualified education expenses, but certain states also offer tax deductions or credits for contributions. This dual benefit can significantly enhance the value of your tax refund investment over time, providing substantial support for future educational expenses.”
Eliminate Toxic Debt
Paying off credit cards might not feel like wealth-building because you don’t get to watch an investment grow. But if you’re paying 25% to the bank while watching an index fund grow at 7%, you’re actually watching your investment shrink.
“Paying down high-interest debt can be a powerful use of a tax refund,” said Brillant. “High interest rates on credit cards or loans can quickly erode wealth, making debt repayment a high-return investment on your refund. My experience with tax and financial planning consistently reinforces the wisdom of using unexpected funds to reduce debt, freeing up more resources for investment and savings.”
About 15% of the study’s respondents said they plan to use their refunds to pay down debt.
Invest in Real Estate
Many people dream of building wealth through real estate but lack the capital needed for an initial investment. A hefty tax refund can provide the seed.
“For those with a keen interest in real estate, using a tax refund as additional savings toward a down payment on an investment property could be worthwhile,” said Brillant.
Even if you don’t have the means or desire to own a property, you can profit from properties through real estate crowdfunding platforms like Yieldstreet, fractional investing or investing in debt or notes through sites like Concreit or by joining private investment clubs like SparkRental.
Either way, real estate has been one of the biggest millionaire-makers for generations.
“Real estate can offer both rental income and capital appreciation, contributing to wealth building,” said Brillant. “In my practice, clients who have strategically invested in real estate often see substantial long-term benefits, making it an option worth considering for your tax refund.”
Although it’s tempting to turn your tax refund into a Jet Ski or a new barbecue grill, fewer than 5% of the study’s respondents will use theirs to treat themselves — and that’s good news because they’ll get more for their money by securing their financial futures.
“Whether it’s enhancing retirement savings, investing in education, reducing debt, or exploring real estate investments, the key is to select the option that aligns with your financial goals and situation,” said Brillant.
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