Contributed by Kelly Spors
Given all the business deductions available in 2011, there’s a decent chance you got a refund from Uncle Sam or are awaiting your refund. It’s often tempting to treat such tax refunds like gifts and splurge on things you want, whether it’s a vacation or the latest personal gadget. But the more responsible – and potentially lucrative – thing to do is to invest the money for your future. Chances are, your retirement account could use a little extra cushion these days.
By investing the refund money today, you can benefit from compounding returns – or the idea that you will generate earnings that over time will generate their own earnings, allowing your invested sum to grow exponentially.
Here’s a look at how investing your 2011 tax refund can pay off down the road:
Let’s say you received back from Uncle Sam $3,000, which is the average tax refund amount today, according to the Internal Revenue Service. You put that $3,000 in a broad mix of stock and bond mutual funds inside, say, a Roth IRA. (A nice advantage of the Roth is that, while you don’t get any upfront tax deduction, the money grows and can be withdrawn tax-free in retirement.)
That $3,000 would grow to about $9,500 after 20 years, assuming a 6% average annualized rate of return – or more than triple its current value. Now let’s say you decide to invest every tax refund you get for the next 20 years, and, for simplicity’s sake, we’ll say you get $3,000 every year. You’ll have almost $117,000 in your Roth after those 20 years. That alone probably isn’t enough to fund the retirement of your dreams, but it’s a nice extra cushion. And it’s certainly enough to help you pay for those extra things in retirement you may dream about, whether it’s a trip around the world or a timeshare on the beach.
Of course, there are many other responsible ways business owners could spend their tax refunds, including paying down debt or investing it back in the business. So if you’re unsure what’s right for you, it’s worth consulting your accountant or financial advisor.
About the Author:
Kelly Spors writes for RothIRA.com, a leading retirement and Roth IRA resource. A former Wall Street Journal reporter, Kelly has written about small business and personal finance for The New York Times, Entrepreneur magazine, Yahoo! and SmallBizTrends.com.
