Ever wondered how to make the most of your tax refund? Last year, the average U.S. tax refund was more than $3,100. This sum, whether it's a few hundred or several thousand, presents an opportunity for you to invest and grow your money if you don't need to spend it immediately.
You can easily let your refund money disappear by spending it on everyday purchases or let it sit idle in a low-yield checking account. But why do that when, given the current favorable interest rates, you can move it into a top-earning cash account and let it grow? And the best part, you won't be risking it in the stock market.
At present, high-yield savings accounts are offering up to 5.00% APY, and the top money market account yields around 4.00%. Brokerage and robo-advisor cash accounts provide about 3.3% to 3.6% interest on uninvested balances, and some even offer promotional rates nearing 3.90% or 3.95%. These appealing accounts let your refund earn interest without losing access to the money, making it a sensible spot to keep if you're uncertain about needing it soon. Just imagine, a $3,000 refund earning approximately 4% APY could result in roughly $120 additional income over a year.
Furthermore, most federally insured banks and credit unions offer coverage up to $250,000 per depositor. Brokerage cash accounts usually also provide similar protections in collaboration with partner banks, ensuring you earn appreciable interest with zero risk. If you predict not needing your refund for a while, you might want to consider a certificate of deposit (CD) that offers a guaranteed APY, something savings accounts cannot offer.
Savings, money market, and cash management accounts can lower their rates anytime, meaning the earnings on such accounts can't be predicted. On the contrary, a CD secures your APY for its full term. Current nationwide best CDs offer up to 4.50% return rate on a 7-month term. However, the accessibility to such accounts comes with a trade-off as CDs often impose an early withdrawal penalty. But if you can afford to let your refund be for a preset term, a CD can provide predictable, risk-free growth.
Lastly, with CDs, you're not just securing an interest rate, but the penalty for early withdrawal can encourage you to leave your refund alone and let it grow. A popular strategy is to split your refund into a high-interest account for immediate access and a CD for guaranteed returns. This method aids in managing unforeseen expenses while ensuring at least some of your money continues to earn at high rates.
Therefore, in the present attractive rate scenario, your tax refund can offer more than just a fleeting surge to your checking account. With prudent savings or CD strategy, or both, it can yield predictable, low-risk growth.