At the beginning of your federal career, you likely considered your federal tax refund as extra money you could use to treat yourself and your family. Then again, when you’re close to retirement, any type of financial windfall may be better used to prepare for your golden years.
Pay Down High-Interest Credit Cards
A ever-growing number of Baby Boomers are carrying high-interest credit card debt into retirement. Even worse, year after year the balances they owe are getting higher than previous generations of retirees, even when adjusted for inflation. With credit card interest rates outpacing historic stock market returns, eliminating as much consumer debt as possible before you retire needs to be a priority. Using your tax refund to pay down your highest-interest credit card is a good place to start.
Make Additional Payments To Your TSP Loan
When you carry an outstanding balance on a Thrift Savings Plan (TSP) loan into retirement, you only have 90 days to pay it in full. If that’s not possible, the amount you owe is considered a TSP distribution that’s subject to federal income taxes and it may bump you into a higher tax bracket. To help pay off your TSP loan quicker, you can use your tax refund to make an extra payment using a personal check, cashier’s check, money order or a direct debit.
“An emergency fund can also help cover your expenses during the delay before you start receiving your monthly FERS annuity (pension).”
Start An Emergency Fund For Retirement
When you’re retired, an emergency fund provides a liquid-cash resource when the unexpected happens. If you’re forced to tap into your TSP to cover rainy day expenses, you’re putting your long-term financial security at risk. Depositing your tax refund into an emergency fund can also help cover your living expenses before you start receiving your monthly FERS annuity (pension). To play it safe, you’ll need enough to cover the two-month delay until you start receiving interim payments of about 80% of your full net annuity.
Add An IRA To Your Retirement Savings Strategy
Federal employees can contribute to an Individual Retirement Accounts (IRA) in addition to their TSP. When you max out your TSP in a given year, contribute your tax refund to a traditional or Roth IRA to save even more for retirement. The 2024 contribution limit for an IRA is $7,000 plus an additional $1,000 if you’re age 50 or older. However, if you’re planning to contribute to a Roth IRA your income may be a factor. Go to the IRS website for complete information.
For other tips on investing your tax refund for retirement, connect with an FRC® trained advisor.
