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7 tips to give your clients on investing their tax return

April 19, 2022
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Key Takeaways:

  • Tax season provides an opportunity to reach out to your clients and provide suggestions when it comes to investing their tax refund
  • Conversation starters include starting an emergency fund, reducing their debt, starting a new home improvement project, Increasing 401(k) contributions, contributing more to an HSA, putting money into a college fund, and tax-advantaged investing

Tax season is here! For many of us, that means a tax refund. It can certainly be tempting to use your refund to buy the latest electronics or book a dream vacation. Immediate gratification can be hard to resist.

But what about investing that money to potentially set yourself up for more success in the future? Some of the greatest pieces of advice given to me is that anytime you receive a tax refund, a bonus, or an unexpected financial windfall, you should invest or save it for the long-term, rather than spending it now.

This is a great time to reach out to your clients as many are still finalizing their tax returns and getting things in order for the rest of the year. Below are several conversation starters and considerations to help your clients when it comes to investing their tax refund.

Increase or start an emergency fund

Unplanned expenses can arise at any time. An important part of your job is helping your clients to be prepared. Talk with them about setting aside savings specifically for the types of events that could trigger an unexpected financial burden. After living through a pandemic, many clients understand how unexpected health issues, job loss and caring for family members can have a profound impact on their finances. Most experts recommend three to six months1 of savings to cover living expenses. As a trusted financial professional, you can help guide your clients to what is best for them.

Reduce their debt

A great way for clients to utilize unexpected money is to put it towards paying down debt. In general, it is a good idea to start with their highest interest rate debt. Work with your clients to help them evaluate their credit cards, student loans, car payments, and other outstanding debt to decide which obligations they should tackle first, and to develop a plan of action that will help them pay off their debt in the fastest, most effective way.

Start a new home improvement project

One way your clients could invest their tax refund, while at the same time satisfying their urge for immediate gratification, is investing in a home improvement project that they’ve been putting off. This will give them a sense of accomplishment, improve the functionality of their house, create a more pleasing environment while also potentially increasing resale value.

Increase 401(k) contributions

Since 401(k) contributions are made using pre-tax dollars, your client can lower their taxable income now while investing more tax-deferred for their retirement. Many companies offer a dollar-for-dollar match up to a certain percentage, giving clients extra money to put towards their retirement. Make sure clients invest enough that they don’t leave this extra money on the table and encourage them to max out contributions if they can.

Contribute more money towards an HSA

HSA accounts are a great way for clients to invest more pre-tax dollars and grow them tax-deferred for their healthcare expenses in retirement. According to our “Health Care and Long-Term Care Consumer Survey,” 60% of investors are worried about how health care costs may derail their plans for retirement2. Help ease clients’ fears and put their concerns to rest by having a plan for health care expenses in retirement and discussing the benefits that an HSA can provide them.

Put money into a college fund

It’s no secret that college can be very expensive—and costs are on the rise. Many college savings plans allow clients to grow their investment using the power of tax-deferred compounding and that money can often be withdrawn tax-free if it’s used to pay for qualified higher education expenses. Meaning the earlier clients start, and the more they put into a college savings plan every year, the greater their potential growth for the future. To help your clients make the best choice for their situation, you can learn more about the different types of college savings plans here.

Tax-advantaged investing

There are many different ways to help your clients make the best use of their tax return now—and  many ways to help them think about tax-advantaged investing for their future.. And after they’ve maxed out their tax-deferred and tax-free qualified plans, one investing tool that may be beneficial is an annuity. Think of an annuity as an insurance policy for your client’s retirement. There are many different types of annuities, that may help clients invest more tax-deferred, manage market risk or generate guaranteed retirement income. For some common client questions around annuities and how to answer them, view more here.

Sources and Disclosure

  • 1

  • 2

    “Health Care and Long-Term Care Consumer Survey,” conducted by Harris Poll on behalf of the Nationwide Retirement Institute (2018). The fourth annual survey was conducted online within the United States from Feb. 5 though 22, 2018, among 1,007 adults ages 50 and older who have a household income of $150,000 or more (“affluent adults”), and 522 adults ages 50 and older who are or have been caregivers.

  • Investing involves market risk and there is no guarantee that investment objectives will be achieved.

    Federal income tax laws are complex and subject to change. The information is based on current interpretations of the law and is not guaranteed. Nationwide and its representatives do not give legal or tax advice. Please consult an attorney or tax advisor for answers to specific questions.