Stock Market Investors » Stock Tax Issues » Tax Refund Investment Solutions

Tax Refund Investment Solutions

Tax refunds require some considerations.

First of all, you should consider the tax situation you are currently in. Also you have to make some adjustments to the withholdings you make. You should remember that this tax refund doesn't represent a special award, but just you are getting the money you have paid back.

Secondly, if the tax refund is of significant amount, consider the option of reinvesting it in something that will return you profits in the future. Avoid spending the money on something you will later regret.

The exact nature of the investment will depend on your current position and on where you want to be in the future. The achievement of your goals depends on the time horizon you have for investing as well as the risk tolerance you possess. So, before you invest the money take a minute and consider these factors.

Depending on the amount of time you have before you as well as the various investment solutions you can take different courses of action.

Time Horizon	Recommendation
2 or less years	We recommend the investment in the following: Bank certificates of deposit US Treasury bonds and bills High quality corporate bonds Money market accounts Despite the relatively low returns you will get, these investment solutions provide high level of security, since the main concern should be on preserving the capital you have accumulated.
2 to 4 years	We recommend the investment in the following: Balanced mutual funds (a combination of bonds, stocks and cash) Money market funds with high yield This somehow longer period provides you with more flexibility than the previous one. On the other hand, if you have a goal of saving for future large expenses (e.g. college tuition), it is recommended that you maintain part of your money in fixed income products, such as the ones mentioned in the previous time period.
5 or more years	We recommend the investment in the following: Individual stocks Mutual funds The latter should serve to balance your investment portfolio against the risks related to stocks. Stocks are beneficial since they offer higher rate of growth. Characterized by short-term volatility, you should keep in mind that it will be hard to predict their price at the time you will need to withdraw your money. Finally, be aware that stocks are one of the most risky investments.

Time Horizon

Recommendation

2 or less years

We recommend the investment in the following:

Bank certificates of deposit
US Treasury bonds and bills
High quality corporate bonds
Money market accounts

Despite the relatively low returns you will get, these investment solutions provide high level of security, since the main concern should be on preserving the capital you have accumulated.

2 to 4 years

We recommend the investment in the following:

Balanced mutual funds (a combination of bonds, stocks and cash)
Money market funds with high yield

This somehow longer period provides you with more flexibility than the previous one. On the other hand, if you have a goal of saving for future large expenses (e.g. college tuition), it is recommended that you maintain part of your money in fixed income products, such as the ones mentioned in the previous time period.

5 or more years

We recommend the investment in the following:

Individual stocks
Mutual funds

The latter should serve to balance your investment portfolio against the risks related to stocks. Stocks are beneficial since they offer higher rate of growth. Characterized by short-term volatility, you should keep in mind that it will be hard to predict their price at the time you will need to withdraw your money. Finally, be aware that stocks are one of the most risky investments.

Final Piece of Advice

If you have a short time period in front of you, the investing approach you should apply should be more conservative. Remember that the higher the potential returns the higher the associated risk is. Additionally, stocks with high level of returns are accompanied by higher volatility. Often times market fluctuations will have a discouraging effect on you, but try to ignore it and let the more aggressive investments award you with their high returns, but only if you have a longer time period in front of you.

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For knowledge we can highly recommend you subscribe to the The Wall Street Journal.

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