Clark Howard: Use tax refunds for retirement instead of immediate purchases

Consumer adviser Clark Howard is advising taxpayers to save their tax refunds for retirement instead of spending the money on immediate purchases. Howard recommends putting the windfall into a Roth IRA to maximize long-term growth.

As tax season continues, many Americans are anticipating refund checks from the IRS. Howard notes that while the influx of cash is exciting, redirecting those funds into a retirement account allows the money to grow tax-free over several decades until it is needed.

Howard emphasized that taxpayers should view their refunds as a way to secure their financial future.

“If you, when you file your tax return, are so excited that you’re going to have that really nice refund, well, guess what? I don’t want you to send that refund. I want you to take that windfall of money and I want you to save it for your future,” Howard said.

The adviser specifically suggests using a Roth IRA as the primary vehicle for these savings. Howard explained that depositing the tax return into this type of account ensures the money begins to grow tax-free immediately.

“My favorite way for you to do it is to put it in a Roth IRA. Because you take that tax return, you put it in the Roth, it will start growing tax free through the years,” he said.

Roth IRAs differ from some other retirement accounts in how they are taxed upon withdrawal. If the funds remain in the account until retirement, the owner can spend the entire balance without paying additional taxes on the earnings. Howard noted the importance of this long-term benefit.

“And if you leave that money in that Roth till retirement, guess what? Everything in it you spend tax free,” Howard added.

Howard provides resources for those unfamiliar with the setup process for retirement accounts. He maintains a step-by-step Roth guide at clark.com that covers how to open and fund the account, as well as annual contribution limits.

“I have a Roth guide at clark.com that takes you step by step how to open a Roth, how to fund the Roth and how much you can put in that Roth each year,” Howard said.

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