4 Creative and Smart Ways to Invest Your Tax Refund

What’s the secret to a bigger tax refund? Investing. We’ll highlight four creative and smart ways to invest your tax refund.

How to Invest Your Tax Refund

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According to the latest IRS data, U.S. taxpayers received tax refunds amounting to $324 billion last year. Given the average refund was $2,899 per taxpayer in 2018, tax refunds provide taxpayers with a decent amount of money every year.

You can spend your tax refund in many ways, from paying off a student loan to saving for retirement. You can also cater to some wants like upgrading your wardrobe or getting the latest gadgets.

However, before you do that, it’s important to remember that the government isn’t giving you free money.

Although it might not feel like you’ve earned your refund or worked hard for it, treat it the way you would treat your monthly paycheck or better. The most advisable thing to do is invest the money.

You have many investment opportunities you can pursue once you get your tax refund. You don’t have to invest using traditional tools which are rigid and dated, either.

In this article, I will give you four specific ways you can invest your tax refund. Rather than give you a laundry of possible ideas, I want to narrow it down to just a handful of ideas that will actually work for you.

1. Put it in a high-yield savings account with CIT Bank

Instead of putting your money in a regular savings account with returns that barely surpass the inflation rate, you can open a CIT Bank Savings Builder account that offers flexibility ideal for many savers and requires only $100 to get started.

CIT Bank is run by CIT Group, a financial services company that has been operational for 111 years now (since 1908). CIT Group is a publicly traded company on the NYSE.

So why should you invest your tax return here?

CIT Bank is committed to growing and preserving its customer’s savings. Considering the bank is FDIC insured (up to $250,000 per depositor), and savers can earn an APY (Annual Percentage Yield) of up to 2.30%, investing with CIT is undoubtedly safer, more profitable and secure.

The Savings Builder account is a high-interest savings account with 24/7 digital/online access. If you are wondering how CIT Bank can offer high-interest payments on savings, the Savings Builder account is 100% online, meaning the bank doesn’t incur costs associated with traditional banks.

CIT Bank passes along the savings to its customers. What’s more, savers pay no opening, servicing, incoming wire or online transfer fees.

Although the minimum balance required to open a Savings Builder account is $100, you need to save more. Monthly savers need to save $100 or more within a given evaluation period to earn the high APY.

High balance savers should have an account balance ranging from $25,000 or more (during the evaluation day) to qualify for high-interest rate payments on their savings.

CIT bank has an evaluation day every month meant to check if savers have met account balance requirements. Interest is compounded daily and added to a saver’s account every month. You have access to your account 24/7, and you can also initiate up to six free transactions.

Opening a CIT Bank Savings Builder account is easy. Just provide some basic personal information like your name, email, phone number, and social security number. From there, proceed and fund your account with $100 or more via electronic transfer, wire, or mail in a check.

You should receive an email confirmation instantly when you complete the process, and that’s it. You can rest easy as your tax refund earns interest income that surpasses industry rates.

2. Invest in others through Lending Club

You can also use tax refunds to join Lending Club, a peer-to-peer lending platform that takes bankers out of the equation. Like CIT Bank, Lending Club is also a publicly traded company at the NYSE.

This lending platform has been around since 2006, and it allows investors to select the loans they want to invest in based on the information available about a borrower, loan amount, loan purpose or loan grade.

Lending Club investors earn interest income, while borrowers get access to unsecured personal loans ranging between $1,000 to $40,000.

Putting your tax refund into Lending Club is perfect if you enjoy helping others and want to earn competitive returns simultaneously. Lending Club borrowers are typically individuals who have difficulty accessing conventional financing, so you’re providing a new avenue for that as an investor.

As a Lending Club investor, historical data shows you’ll earn returns ranging from 3% to 8%. You’ll need to buy Lending Club notes, which are simply securities representing portions of borrowed loans.

Investors grow their investments when borrowers make monthly repayments on the principal and interest. The minimum investment required is $1,000.

Alternatively, you can make forty, twenty-five dollar increments. The benefits of diversification are enjoyed when you invest $2,500 or more although 99% of all Lending Club portfolios enjoy positive returns.

You can determine the risk you will take, too. Grade A and B notes offer the lowest risk which translates to lowest returns. D to E grade notes provide the highest risk and returns. It’s up to you to determine your risk appetite.

You can invest with Lending Club for 3 to 5 years. The notes match the loan terms available to borrowers. You can choose a 3 or 5-year investment term or a combination of both.

Since investor’s returns are determined by the payments made by borrowers on their loans, they see the principal and interest repayment activity on their accounts. Prepayments are also visible if a borrower repays their loan early.

To calculate how much you’ll earn (the net annualized return), subtract Lending Club’s fees (approximately 1%) and the charge-offs and prepayments from the average borrower interest to get an average return of 3% to 8% annually.

Lending Club has many investor accounts. The Individual account is opened in your own name, and you need at least $1,000 to open this account.

You can also open an IRA account tailored to specific investment objectives. You need at least $5,500 to open this account.

Lending Club also has a Joint account for two or more people with joint interests. You need at least $1,000 to open this account.

You can open a Trust account on behalf of specified beneficiaries or a Custodial account for minors. Both accounts demand at least $1,000.

Lending Club also has a corporate account, ideal for authorized representatives of a corporation. The minimum deposit needed for this account is $50,000.

As you can see, Lending Club offers a ton of options for you to invest your tax refund, and we highly recommend checking this one out.

3. “Invest like a woman” with Ellevest

Ellevest is a unique robo-advisor that accommodates women. The investment platform was born out of the need to make the investment industry gender-neutral.

With 86% of investment professionals (advisors, to be specific) being men aged 50 years or older, investment opportunities have been generally inclined to suit men.

Gender-neutral investing doesn’t factor important things like pay gaps and lifespan which don’t match for men and women.

Ellevest considers the gender pay gap among other factors like childbirth and raising children. Expected returns are also calculated and expressed based on the understanding that women generally live longer, so they require longer draw-down periods in retirement.

Gender-specific differences aside, Ellevest is a robo-advisor offering index and personalized passive portfolios which follow modern portfolio theory principles.

Ellevest has many plans:

  • The most basic, Ellevest Digital, charges an interest of 0.25% yearly of assets being managed for balances of $1 to $50,000. A charge of 0.50% applies for balances ranging from $50,000 to 1 million for premium accounts.
  • Premium account holders get access to financial planners offering personalized guidance on finance. Executive coaches are available for offering advice on career events and salary negotiations.
  • If you wish to invest more than a million dollars, you can open an Ellevest Private Wealth account.

Ellevest has notable benefits, too.

For instance, the accounts are easy to open and access. Ellevest also follows socially responsible investing principles by offering investment advice and products that factor in commonly overlooked but vital gender differences.

Most importantly, you can rest assured knowing the tax refund you invest is secure. Ellevest’s website uses advanced browser encryption. The platform has also taken several measures to prevent fraud such as including personal identification verification and a two-step link for transfers and withdrawals.

Ellevest has also pledged to safeguard customer information. Your data is safe from third parties. And deposits are held by SEC-registered broker FOLIO.

As a SIPC (Securities Investor Protection Corporation) member, FOLIO has depositor insurance amounting to $500,000 per account.

Ellevest investors also face low investment costs (0.25% to 0.50% per year), and you need not maintain a minimum balance. What’s more, your fees will reduce further if you continue investing more and there are no charges for transfers and withdrawals.

The only fees you should expect paying are those charged indirectly by fund providers although such charges aren’t deducted directly but as an adjustment to the price of the mutual fund or EFTs.

Ellevest has an investment committee that selects low-cost investment vehicles only to reduce overall charges/costs.

Specially focusing on gender, Ellevest is one of the most suitable investment vehicles for women with some money to invest. The platform’s automated features and custom portfolios with robo-advisor outperform many investment vehicles available for women.

Ellevest also caters for many clients including high-net-worth individuals who would love access to executive coaches and financial planners. Ellevest can accommodate men, although it is more suitable for women.

4. Throw your refund into Acorns

Acorns targets investors who would love to invest their spare change. If tax refunds qualify as spare change to you, consider this one (my return was like $60 one year).

Acorns acknowledges the difficulties a person faces when they try investing on a tight budget or small paycheck. Acorns can be defined as a micro-investing platform that allows you to invest spare pennies as you learn the basics of investing.

It is possible to save past $1 million, though, which makes the platform ideal for both macro and micro-investing.

It takes minutes to set up an account with Acorns. You just need to download the app and connect it to your credit or debit cards with your account. Acorns will round off every purchase to the nearest dollar and save the difference.

The change is invested in an Acorns account of your choice. Acorns offers a variety of portfolios which are combinations of bonds and exchange-traded funds. Every portfolio has investor preferences ranging from aggressive to conservative.

You can change your account as you like. They include but aren’t limited to, setting up automatic updates on a daily, weekly or monthly basis. Investments are made based on your portfolio settings. Acorns investments can take 1 to 3 days to process as timing varies depending on ETF market hours.

Acorns has special features like Found Money, a cash-back program that allows users to receive a percentage of what they spend at partner stores instead of getting a fraction of purchases back. Found Money deposits are made 30 days after a purchase.

Acorns has three main price levels set at one, two and three dollars:

  • Acorns Core, which is the original service, rounds off purchases to the nearest dollar comes with notable pros like custom investment and a free version for college students.
  • The second price level (Acorns Core +) for $2 adds the spare change to a tax-deductible IRA plan.
  • The third price level (Acorns Core, Acorns Later, and Acorns Spend) for $3 consists of all the above price levels and comes with a checking account and a debit card. This account attracts zero fees.

If you are wondering how Acorns makes money, there are over four million Acorns users. Acorns makes money today by charging its members a fee.

The company was established in 2014 by a father and his son. In its early years, funding was sought from venture capitalists. In 2015, the company earned $23 million during its 3rd round of funding (eight months after being launched).

The first and second round of investment netted the company $9 million. Acorns held the fourth round of funding in April 2016 and raised $30 million to expand its micro-investing business. The company can rely on membership fees today.

While it may not seem like a traditional place to sock your tax refund away, I love this option to start with a lump sum and invest more and more as you make purchases.

Bottom Line

There are hundreds of ways you can invest your tax refund, but these are four we feel excited about in 2019. Whether you choose a savings account, a micro-investing platform, a peer-to-peer lender, or a robo-advisor geared toward women, you can’t go wrong with these options. And if you’re looking for another creative idea, find out our thoughts on investing in cannabis using an IRA.

Remember, a tax refund shouldn’t be used for a spending spree. We strongly advise you invest it smartly and responsibly so your money grows. That doesn’t mean you can’t set aside a few hundred bucks for a Nintendo Switch or something, though ;-).

Topics: InvestingTaxes

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