If you're expecting a tax refund this year, there are many ways you could put that money to work. You could spend it on something you’ve had your eyes on for a while, pay down debt or put it towards your kids’ education fund. You might even want to divvy up your refund across those options (spread the love).
You could also stash that refund away in your retirement account. When it comes to building up your nest egg, every little boost can help in the long run.
Before we get into how you could put your tax refund towards your retirement, check to make sure you don’t need the money to cover any immediate purchases or expenses.
Ask yourself if you need to use the refund for something else. For example, perhaps, you’re planning on buying a home or investment property soon, and you would rather use the refund to help build up your cash reserves. By taking a moment to look at your overall financial picture, it could help you decide how much of the refund to set aside for retirement. And if you’re able to put some or all of your refund towards your nest egg, here are two options to consider.
Putting money regularly into your IRA is a smart way to build up your nest egg. If you decide to stash a portion of your refund in your IRA, your contribution could help boost your retirement savings by putting those dollars to work right away.
Just remember that IRAs, both traditional and Roth, have annual maximum contribution limits. For 2023, you can sock away up to $6,500 (or $7,500 if you’re age 50 and older - see "catch-up contributions") between all of your traditional and Roth accounts. For 2024, the maximum annual contribution limit is $7,000 (or $8,000 if you're age 50 or older).
If your refund could help you reach your annual contribution maximum, that’s a serious accomplishment! It could bring you one step closer to your retirement goals – what a great way to treat yourself.
Learn more: Traditional vs. Roth IRA: Which Is Right for You?
If you’re not already maximizing your 401(k) contributions, your tax refund could be put to use there, too. You might be wondering: Wait, how could I put my tax refund towards my 401(k) when contributions are automatically deducted from my paychecks?
Good question. One potential way is to increase the amount of your automatic contributions (usually done by contacting your employer's human resources department). When you do this, you’re telling your employer to take more money out of your paycheck for your 401(k). You’re essentially using your tax refund to cover the contribution increase.
On top of this, let’s say your employer offers to match your contributions (usually up to a certain amount). Using your tax refund to hike up your regular contributions might help you snag those matching dollars to supercharge your retirement account.
Good to know: For 2023, the maximum contribution limit for 401(k) plans is $22,500 ($23,000 for 2024). And the catch-up contribution limit for 2023 and 2024 is $7,500 for employees age 50 and older. In other words, those 50 and older could contribute up to a total of $30,000 in 2023 or $30,500 in 2024.
Keep in mind that contribution rules and limits are always subject to change. Visit the IRS website or check in with a tax professional for the most up-to-date information.
One of the potential upsides of saving for retirement with an IRA or a 401(k) is that you might see some tax benefits. If you contribute to a traditional IRA, or 401(k) with pre-tax dollars, you could reduce your tax bill for the year. Plus, your money can typically grow tax-deferred until you withdraw it in retirement.
On the other hand, with a Roth IRA, if you contribute after-tax dollars today, your withdrawals in retirement are generally tax-free as long as certain conditions are met (see the IRS’s Roth IRAs webpage for more information).
Good to know: Your eligibility to deduct a traditional IRA contribution depends on a number of factors, such as tax-filing status, whether you have a retirement plan through an employer, and your income. Visit the IRS website on IRA deduction limits for more information.
A tax refund may feel like “free money,” but remember, it’s simply what you overpaid in taxes to the federal government.
If you’re getting a refund, think about how you might want to use it. Putting that money towards your retirement, for example, is one smart way to put those dollars to work. Whether you decide to park that money in your IRA or 401(k), your future self will thank you for thinking ahead.
This article is for informational purposes only and shall not constitute an offer, solicitation, or recommendation. This article was prepared by and approved by Marcus by Goldman Sachs® but is not a description of any of the products or services offered by and does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article and it is not a substitute for individualized professional advice. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, or any of its affiliates, none of which are a fiduciary with respect to any person or plan by reason of providing the material or content herein. Neither Goldman Sachs Bank USA, nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.
Join our Marcus social media community, where we share content and inspiration to help improve your financial health. See you there!