Tax and bonus seasons are upon us.
If you’re one of the 64% of tax filers who are receiving a tax refund or are employed by an estimated 66% of companies that offer bonuses, it may be tempting to spend your entire check on a fun vacation or a long-desired purchase.
However, this time of year also presents an excellent opportunity to make calculated financial decisions that can help you for years to come, said Jennifer Ellis, a senior consumer product manager at BOK Financial®.
She shares four smart ways to allocate your tax refund or bonus for a healthier financial future.
1. Shore-up short-term savings
One of the first steps toward financial stability is establishing an emergency fund. Ellis suggests aiming to save at least three to six months’ worth of living expenses. Allocating a portion of your tax refund or bonus to an easy-to-access savings or money market account can help you get started.
“These types of accounts have lower minimum balance requirements, making them easier to open if you’re just beginning,” said Ellis. “They can act as a financial cushion, ensuring you're prepared for unforeseen expenses without resorting to high-interest debt like credit cards.”
Certificates of deposit (CDs) are another option to consider. After years of sitting on the sidelines, CDs have made a resurgence as interest rates increased. CDs provide a secure way to grow your money with a fixed interest rate over a set timeframe. CD terms can range from seven days to seven years.
For some, the idea of having your money locked up may cause hesitation. However, some banks offer no-penalty CDs, allowing you to withdraw part or all of your money early without a fee if necessary.
CDs offer higher yields than traditional savings accounts and do not present risk of loss like stocks, making them a good option for individuals looking to preserve their capital while earning a return, she said. Allocating a portion of your tax refund to a CD can be a conservative, yet effective, strategy—especially for short- to medium-term goals, she said.
“Unlike money market accounts, CD rates are fixed. If you’ve been waiting to open a CD, now is the time, while interest rates are higher than they’ve been in the last several years,” suggested Ellis.
2. Increase long-term savings
Thinking beyond the immediate future, consider putting a portion of your refund or bonus into long-term savings—that is, money that’s set aside for a goal that is several years or possibly a few decades away. These goals can include saving for a down payment on a house, a child's college education or your own retirement.
Where you save this money depends on the goal. For example, you might want to consider a 529 plan to save for your child’s college education, a tax-advantaged retirement account such as an IRA for your own retirement or an investment portfolio for any long-term savings goal, said Leasa Melton, a product strategy manager at BOK Financial.
“Investing long-term takes patience. The power of compounding means even small contributions today can have a significant impact in the future,” she explained. “Having a diversified investment strategy allows your money to grow over time and historically reduces risk, helping you reach your goals sooner.”
3. Reinforce your retirement account
If you haven't maxed out your contributions to retirement accounts like a 401(k) or an IRA, Ellis suggests using your refund to catch up.
|Type of Account
|2024 Maximum Contribution
|Traditional and Roth IRAs
Source: US Internal Revenue Service
Individuals 50 years and older are eligible for catch-up contributions of an additional $7,500 to a 401(k) and $1,000 to an IRA, bringing the totals to $30,500 and $8,000 respectively for 2024. These contributions can offer tax advantages depending on your tax bracket and help to ensure a more comfortable retirement.
“Most people prefer to lower their income tax bills,” said Ellis. “Contributions to a 401(k) or traditional IRA are made pre-tax, which means they reduce the amount of income that can be taxed for the year. You won’t pay tax on that money until you take it out of the account later down the road.” Roth IRAs are the opposite. Money invested is taxed now but won’t be taxed when you take it out in the future.
4. Debt reduction and consolidation
If you're burdened by high-interest rate debt, allocating any additional funds you receive toward debt reduction is a wise move. Melton recommends paying down any debt with a high interest rate that doesn’t offer a tax deduction, like credit cards or personal loans.
If you have multiple debts, consider debt consolidation. “Anytime you can reduce the number of debt accounts and consolidate to a lower interest rate, you’re setting yourself up for financial success,” said Melton. Tapping into your home equity to consolidate your debt is one way to do this. However, Melton cautions those considering this method to look carefully at the amount you’ll pay over the long-term and not just your new monthly payment.
Yes, you can spend some, too
Receiving a tax refund or a bonus is an opportunity to make strides toward your financial goals, but don’t forget to have a little fun too.
“Give yourself permission to spend a little on enjoying life today as well, especially if it will make the harder aspects of saving more palatable,” suggested Ellis.
The key is to find the right balance based on your individual financial goals and circumstances. She also recommends consulting with a financial professional to tailor these strategies to your specific needs.
Information in this article should not be construed as tax advice and is offered for general informational purposes only.