Courtesy of the Tax Cuts and Jobs Act legislation, about 90% of Americans are seeing more money in their paychecks after withholdings.
And this is great news.
Approximately 75% of taxpayers will likely expect a refund this year based on data found in the IRS 2016 stats at a glance.
Most people could benefit tremendously from not having a refund, but instead having higher monthly cash flow to organize payments to investments and debt. For help in determining the proper W-4 withholding level, you may find this IRS withholding calculator helpful.
But before spending any of this money, consider the five best things for you to do with your extra cash-flow.
Create an emergency reserve or correct deficiencies to emergency reserves - According to a 2017 GoBankingRates survey, more than half of Americans (57 percent) have less than $1,000 in their savings accounts. You should have between three to six months expenses in cash reserves depending upon the types and designs of your casualty and disability insurance in place.
Pay Down Debt – Not all debt is created equal. In most cases, I would recommend against paying down mortgage debt, but there may be exceptions if the rates are higher than six percent. In the case of student loans, it depends upon the rate of interest being charged. Credit cards are not your friend if you carry a balance. If you have credit card balances you should start by paying down your highest interest rate card first, while paying minimums on the rest until your highest rate card is paid off. Then, you can switch to the next highest rate card and so on until your debt is all paid off.
Increase contributions to your 401k or retirement plans – I love the idea of increasing your contributions to your retirement plan, whenever you get a pay raise. I often recommend escalating your contributions every year. A tax decrease has the same impact as a pay raise, meaning more take home pay for you. Time to put some of the tax savings into your future retirement income.
Contribute to a ROTH or IRA – If you have a ROTH and you are under the income limits, consider making maximum contributions or opening an account. If you make too much to contribute directly to a ROTH, you may contribute to an after tax (non-deductible) IRA. There may be additional opportunities to get after tax IRA to ROTH.
Consider the use of an HSA – You have undoubtedly heard more about HSA accounts since the costs of healthcare is rising so rapidly. HSA accounts are pretax Healthcare Savings Accounts combined with high deductible health plans (HDHP). The money in the HSA is used to pay out of pocket expenses and used tax free. Money not used in a tax year is rolled over and additional money can be added each year. The money can be invested like your retirement plans.
Bryan D Beatty, CFP® AIF®