Four Ways to Save Your Tax Refund Safely


If you’re one of the many American taxpayers set to receive a whopping tax refund this year (the average tax refund last year was almost $3,000), you probably want a few good ideas on what to do with it. A few years ago, I shared six ways to spend that money wisely but this year I want to go in the other direction – what’s the best way to save some of that money for the future?

Now, before we get into the suggestions I have for “safe” places to save that money, I wanted to point out that it doesn’t have to be an either or decision. You don’t have to spend it all or save it all! It’s perfectly reasonable to spend a little, whether it’s on a gift for yourself or to help pay down some debt, and then save the rest.

So, what are these safe ways to save your money?

Online Savings Accounts

Online savings accounts offer a relatively high interest rate while offering complete protection of your principal by way of the FDIC insurance program. While the interest rate today is going to be around 1%, it’s higher than what you’d get at almost any local bank or credit union. Sadly, because of the economic environment, savers are simply not being rewarded for their thrift because everyone else wants you to spend your hard earned money to pump up the economy. Until the economy recovers, we’ll probably see these low rates for quite some time.

Certificates of Deposit

That said, you can always take advantage of certificates of deposit to get slightly higher yields in return for locking your funds up for a set period of time. Twelve month CD rates are going to be slightly higher than a savings account and if you don’t need your money for quite some time, it might not be a bad idea.

Series I Savings Bonds

For a slightly higher yield, you can always look at Series I Savings Bonds. Series I Savings Bonds are inflation adjusted bonds that currently offer 1.76% yield. There is an annual limit for how much you can buy each year ($10,000 electronically and an additional $5,000 if you apply your tax refund to a bond) and the inflation rate changes every six months (May & November). The rate is higher but you cannot withdraw your money for a year and if you do before 5 years, you forfeit the last 3 months of interest.

That said, there are tax benefits to the bonds since interest is exempt from local and state taxes (but not Federal). The interest may also be excluded from Federal income taxes if used to pay for education. These are backed by the full faith and credit of the United States, which is about as strong a guarantee as you can get.

Municipal Bonds

Unlike the other suggestions in this list, municipal bonds are not nearly as safe but they do offer a little stability with a higher yield, in some cases. A municipal bond is a debt instrument issued by a local government, or agency, and they are often used to raise funds for various projects. The benefit of municipal bonds is that they’re backed by the municipality that issues them and are, in most instances, relatively safe (more so than corporate bonds). That said, governments have defaulted on municipal bonds so I don’t want you to get the idea that these are anywhere close to being as safe as an I bond or a savings account.

What are the benefits? A higher yield, a shorter time frame, and exempt from federal and usually state income taxes, certainly exempt from taxation by the municipality that issues it. This results in a higher yield when compared to alternatives. If you do opt to invest in a municipality, it’s often better to do so in your own state and municipality for the tax reasons.

Finally, I want to leave you with one thought, especially when rates are so low, it’s often more important that you save in the first place. The options are not great right now given the rates but having money saved aside for future needs is better than not having it. You may not be earning that much on your money but just saving will put you further along.

Jim Wang, the personal finance guru behind Bargaineering.com is actually a longtime, well-respected, and famous member of the FatWallet community. Jim is one of the experts in the finance forum and has been sharing knowledge and helping people out for almost 10 years. You may also connect with Jim on .

Cash Back Resources

 

Additional Resources

eSmart Tax Coupons
TaxAct Coupons
TaxBrain Coupons
TurboTax Coupons
Tax Resources You Absolutely Must Know About
Making Tax Season Easy
Make Life Better and Your Wallet Fatter with Tax Credits
The Big 0: Why It’s a Good Idea to Break Even With the IRS
10 Tax Deductions You Cannot Miss

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>