Investing Your Tax Return

The deadline to file your 2022 taxes is fast approaching - taxes are due this year on April 18th. The good news is that receiving your tax return is easier and faster than ever. Between quick processing times and direct deposit, you can receive your return in your bank account within a few days of filing. According to Taxpayer Advocate Service, 2 out of every 3 individual taxpayers were eligible for refunds last year. The average refund size was around $3,200 - a significant amount that could be used to invest in the markets.

Who is investing their tax return?

In Magnifi’s Q1 2023 survey, we found that 48% of individuals are planning to invest at least some of their tax refund, while 52% are not. Within that group, we found that 55% of men and 42% of women were planning to invest their tax refund this year. This aligns with previous Magnifi survey data that found that men were generally more likely to be investors than women - a trend we hope is on its way out!

You don't need to be an expert to invest.

When looking at generations, Millennials were the most likely to invest their tax return - with 61% saying they would. Boomers were the least likely, with only 35% saying they would. Gen Z and Gen X were equally likely at 48% for both generations.

What can you do with your tax return?

In a previous Magnifi survey, we found that “not having enough money” was the biggest barrier to investing. 42% of people said that not having enough money was stopping them from getting in the market. The truth is, you can get started investing with any amount - including some or all of your tax return. With fractional investments, it’s easier than ever to invest. Many fractional investments start at $5, so you can invest an amount that’s comfortable for you.

If you’re not sure how to get started investing, here are a few tips:

Uncover Your Investing Style. When you’re just getting started, making those first few investments can seem intimidating. One way to ease into investing is to figure out which TYPE of investor you are. With Magnifi Personal’s investing personality test, you can see if you are driven by Touch (prioritizing relationships); Security (ensuring their financial future); Purpose (positively impacting the world) or Viewpoint (expressing intellectual curiosity through investing). Once you’ve uncovered your style it can be easier to invest in line with your beliefs.
Start with a Plan. Having specific goals can help you to stay motivated over the long term. With a specific goal in mind, create the steps you are going to take to achieve it (maybe you’re going to cancel some subscriptions, which will allow you to invest an additional $50 every month). Forming a positive habit around investing can make it a part of your routine and watching your investing balance grow can be a great motivator! For specific steps in creating your financial goals, check out this article.
Stay Diversified. The ups and downs in the market recently have highlighted the importance of diversification. When you have exposure to different types of securities in your portfolio, you can better weather economic changes - we can’t predict what’s ahead for the markets, but we can build a portfolio to help withstand different market conditions.

If you’re already invested, you might also put your tax return towards an investing goal, such as:

Retirement. Magnifi’s Q4 2022 survey found that 54% of individuals were “nervous that my financial situation will not allow me to retire by 65.” If you are in the majority in not feeling on track to retire, your tax return can be a great infusion into your investing portfolio to help you catch up. In 2023 the 401(k) contribution limit is increasing to $22,500 and $6,500 for IRAs. You can even contribute to your 2022 IRA up through April 18 of this year.
College Savings. Magnifi Personal can help you understand what steps you will need to take to fund your education or that of a family member. If you are contributing to a 529 plan, you can generally contribute up to the federal limit for gifts ($17,000 for an individual and $34,000 for married couples) for each beneficiary in a given year before you trigger a taxable event.
Emergency Savings Fund. Unexpected expenses are never fun. Whether it’s new brakes for your car or an emergency trip to the vet - having a fund set aside for the unexpected can give you peace of mind and support you when the time arises (and prevent you from taking on any debt). An emergency savings fund should cover 3 - 6 months of your living expenses.

Your investments are taxable

It’s never too early to start planning ahead for next year’s tax season. Investments are taxable, so there are a few things you can keep in mind when you invest this year:

Check up on the tax breaks available for federal, state and municipal bonds.
Familiarize yourself with the tax implications of short-term and long-term capital gains.
Search Magnifi for tax managed investments - or investments seek to help manage their tax liabilities.

In Summary…

Tax season doesn’t have to be all tears and papercuts. Investing your tax refund can be a great way to jump start a new investing goal or help you catch up on retirement. Whether you’re just getting started investing or deep into your investing journey, this one time infusion of cash can help you stay on track for your 2023 investing goals.

References:

“National Taxpayer Advocate delivers Annual Report to Congress; focuses on taxpayer impact of processing and refund delays,” 11 Jan 2023, Taxpayer Advocate Service, link.
“The State of Personal Investing Q1 2023,” Magnifi, link.
In a Q4 2022 study, Magnifi found that 26% of men said they’ve never invested in the stock market while 41% of women said that they’ve never invested in the stock market.
“5 Year-End Tips to Make the Most of Your Investments,” Magnifi, link.
Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.
“The State of Personal Investing EOY 2022,” Magnifi, link.
A 529 plan is a college savings plan that allows individuals to save for college on a tax-advantaged basis. Every state offers at least one 529 plan. Before buying a 529 plan, you should inquire about the particular plan and its fees and expenses. You should also consider that certain states offer tax benefits and fee savings to in-state residents. For tax advice, consult your tax professional. Non-qualifying distribution earnings are taxable and subject to a 10% tax penalty.
Magnifi does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.