3 Creative and Smart Ways to Invest Your Tax Refund

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

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According to the latest IRS data, U.S. taxpayers received tax refunds amounting to $365 billion last year. Given the average refund was $2,879 per taxpayer in 2021, 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 may be rigid and dated, either.

In this article, I will give you three specific ways you can invest your tax refund. Rather than give you a laundry list 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 customers’ savings. Considering the bank is FDIC insured (up to $250,000 per depositor), and savers can earn up to 1.00% APY ... 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.

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.

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

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.

Bonus Savings Option: Deposit Your Refund Into Credit Karma Money Save Account

You can deposit your refund directly into a Credit Karma Money Save account at a pretty good APY.

But there are other benefits to Credit Karma Savings that might make you want to use this account versus your bland old checking account. For starters, its FDIC insured for up to $5 million. That means your deposits are protected. In addition, there are no fees for a Credit Karma Savings account, and there’s no minimum balance you need to open or maintain an account.

Visit Credit Karma or read the full Credit Karma Review

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, LendingClub is also a publicly-traded company on 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 the 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 investors’ 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 Clubs 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.

Related: Best Custodial Accounts

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. 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 Acorns Earn, 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. Acorns Earn deposits are made 90-120 days after purchase.

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

  • Acorns Personal- For $3 per month, the plan rounds off purchases to the nearest dollar and comes with notable pros like custom investment, while also adding a tax-deductible IRA plan and a metal debit card.
  • Acorns Family- For $5 per month, this plan consists of everything from Acorns Personal and also includes investment accounts for kids.

If you are wondering how Acorns makes money, there are over eight 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 rounds 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.

Related: Best Tax Software for Investors

Bottom Line

There are hundreds of ways you can invest your tax refund. Whether you choose a savings account, a micro-investing platform, or a peer-to-peer lender, 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 to 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 ;-).

Chris Muller

Chris Muller

Chris has an MBA with a focus in advanced investments and has been writing about all things personal finance since 2015. He's also built and run a digital marketing agency, focusing on content marketing, copywriting, and SEO, since 2016. You can connect with Chris on Twitter @moneymozartblog.

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