Yahoo Finance 8 Ways the Upper Middle Class Can Use Their Taxes To Get Rich in 2024
At first glance, it might seem like someone in the upper middle class is financially set and doesn’t need to make many money moves to stay that way. But like anyone else, high-earners have their share of expenses and financial goals.
Whether that’s to take a luxury vacation, pay off an expensive home or plan for their children’s — or grandchildren’s — financial future, it pays to make some smart choices with any extra cash that comes their way, including any tax refunds.
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But what exactly should the upper middle class use their tax refunds on to gain more financial stability and wealth? GOBankingRates asked the experts.
Fund Your 529 Plan
For upper-middle-class families with kids, taking advantage of the Child Tax Credit and a 529 Plan helps build wealth.
“Upper-middle-class families with MAGI (modified adjusted gross income) up to $200,000 (single filer) or $400,000 (married filing jointly) are eligible to receive the Child Tax Credit of up to $2,000 per qualifying child for 17 years,” said Susan Einberger, CFP and financial planner at Enjoy the Ride: Financial + Life Planning. “If $2,000 is contributed annually to a 529 Plan, there will be $34,000, not considering any potential investment growth, by the time the child has finished high school.”
But why exactly would a 529 Plan help?
“529 Plans are tax-advantaged accounts because the investment growth and distributions for qualified education expenses are tax-free. Additionally, new legislation allows $35,000 to be rolled from a 529 Plan to a Roth IRA (if all rules are met),” said Einberger. “If executed properly, this strategy uses free money, the Child Tax Credit, to build wealth in tax-advantaged accounts, with the potential for decades of growth and the money never being taxed again.”
Pay Off Any Existing Debts
“While receiving a large tax refund can feel like hitting the lottery, making smart financial decisions with these dollars can propel you towards financial freedom moving forward. Before splurging on trips or diving into any investment opportunities, take a hard look at any high-interest debt you may carry, such as credit cards,” said Brian Seymour, CFP and principal and CEO at Prosperitage Wealth.
According to the Federal Reserve, credit cards have an average 22.8% APR. Depending on the balance, that’s thousands or tens of thousands of dollars.
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“Utilizing your tax refund to pay down this debt can remove a huge barrier to building wealth, as the interest saved often surpasses the potential returns from investing,” said Seymour. “This strategy effectively guarantees a return on your money by eliminating these high-interest costs. If anyone guarantees you a 22.8% return on some investment, run away. Very quickly.”
While you’re at it, put that tax refund money toward the principal on your home to pay it off sooner.
“Assuming the person has a mortgage with a rate which is higher than the existing interest rate in a savings account, prepay the mortgage principal,” said Galina Portnoy, CPA and director of TAG Associates. “This will reduce the total interest paid over the life of a mortgage.”
It will also free up more cash for other investments.
Purchase Government-Issued Savings Bonds
“You can actually use your refund to buy government-issued savings bonds. The I Bond, which was all the rage not too long ago because it was offering over 9% rate on an annualized basis, can be purchased using your tax refund,” said James Osborn, Jr., a certified private wealth advisor and the founder of Envest Asset Management, LLC. “As an individual, you can purchase up to $5,000 by directing the IRS to use your refund to purchase the I Bonds.”
However, you’ll need to hold these I Bonds for at least a year before redeeming them. If you redeem them at this point, you may face an interest penalty. This penalty can be avoided if you wait five years.
Maximize Your Retirement Account Contributions
If you’re not already maximizing your yearly retirement account contributions, your tax refund is a good way to do so.
“Tax refunds can be used to top off your retirement account via an IRA or Roth IRA, which is a long-term wealth creator,” said Osborn. “However, there are income restrictions associated with these accounts, so be sure to understand them so that you can use them to your advantage.”
Currently, you can contribute up to $6,500 in your IRA ($7,500 if you’re at least 50 years old) each year. Depending on how you invest that money, you could see greater long-term returns.
Portnoy suggested using the backdoor Roth IRA strategy if your income is over the limit to contribute to that account. This strategy essentially lets high-earners sidestep this account’s income limits by switching their traditional IRA contributions over to a Roth IRA. You’ll typically need to pay income taxes on the money transferred over, but this could be beneficial when done right.
Invest In Yourself
There’s something to be said for investing in your own personal and professional growth, no matter where you are in life. When you invest in yourself, you’re opening the door to future wealth-building possibilities. So, if you have a tax refund, you might as well put it to good use.
“Consider allocating part of your tax refund towards personal or professional development. Getting a certification through an online class, attending in-person workshops, or investing in resources that enhance your career or business can provide you with the springboard to catapult your success,” said Seymour.
“Bonus, in certain cases you may be able to use the Longtime Learning Credit, which allows you to take a tax credit on your taxes in the year(s) you paid qualified education expenses,” added Osborn.
Diversify
When it comes to investing, you have plenty of options — from IRAs and 401(k)s to 529 Plans. But it’s often wise to view your finances holistically and diversify those investments.
“Beyond these specific accounts, consider investing in a diversified portfolio within taxable accounts, focusing on long-term growth, low fees, and aligning with your risk tolerance and investment horizon,” said Seymour. “This holistic approach ensures you’re not only saving on taxes today but also setting yourself up for financial success in the future.”
Cover Any Other Financial Gaps
If you got a tax refund, now’s a good time to reassess your financial situation and see which areas might have been overlooked last year.
“When a person gets a refund back, they really need to examine any financial gaps that they may have such as replenishing an emergency fund, maxing out retirement accounts, or any other financial goal they may be working toward,” said Kevin R. Chancellor, CEO and financial advisor at Black Lab Financial Services.
Try to Get Your Tax Refund to Zero
Receiving a big tax return might feel nice, but it could be a sign that you should adjust your withholdings and investment contributions.
“If you received a tax refund this year, you overpaid the government that year. This also means that while the government has your money, you are loaning them those funds instead of using them for your benefit,” said Osborn.
“By changing your withholdings on the IRS W4 form, you can determine how much should be withheld from your paycheck to reduce your refund when filing for taxes,” Osborn continued. “The money kept can be used to fund your savings or retirement accounts, helping build wealth.”
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This article originally appeared on GOBankingRates.com: 8 Ways the Upper Middle Class Can Use Their Taxes To Get Rich in 2024
