Instead of blowing your tax refund money on goodies or letting it languish in your checking account, put it to work for you. No matter how small your refund is, this article will tell you where you can invest it. (This year, find out how to stretch these dollars further to strengthen your future. Learn more in Don't Waste Your Tax Refund.)
In Pictures: Top 5 Reasons Why People Go Bankrupt

Ally Bank CDs
If you're looking for a safe way to invest your money, a certificate of deposit (CD) from Ally Bank might suit you. This online bank offers three types of CDs:

    • The high-yield CD has terms ranging from three months to five years. Its rates vary from 0.84-2.99% (significantly higher than the rates of many of its competitors) depending on the term you select.
    • The annual percentage yield (APY) on a five-year deposit, for example, is 2.99%, resulting in earnings of $794.53. Although this does not seem like a hefty return, CDs are safe investments and a better allocation of funds than wasting your return on unnecessary products.
    • The penalty-free CD has an 11-month term and 1.35% APY. The rates offered by Ally are greater than those of competitive businesses.

All offers are FDIC insured, compound interest daily, have minimal or no fees and can actually be opened with $0.


High-interest online checking and savings
accounts

These accounts offer considerably higher interest rates and lower fees than traditional banks. Ally Bank, ING, FNBO Direct and Everbank are all good places to start your research.

    • Ally Bank lets you open an online savings account with $0 initial deposit and is paying 1.29% interest as of April 6, 2010. There is no monthly fee and no minimum balance.
    • ING Direct's electric orange checking has no overdraft charges, no ATM surcharges and no monthly fee. You'll earn 0.26% APY on balances of $10,000, and all deposits are insured by the FDIC up to the regulated limit of $250,000. Minimal funds are required to open an Orange ING Savings Account.
    • The FNBO Direct Online Savings Account is currently paying 1.25% APY and is not subject to monthly fees or a minimum balance. The savings account is easy to open, and offers individuals various resources to target their investment goals.
    • If you have a larger refund to invest, Everbank also has a high-interest checking account with no monthly fee, but you'll need $1,500 to open an account. As of April 2, your deposits will earn 2.25% for the first 90 days, and 0.95% thereafter for balances of $9,999 and below.


Low initial investment IRAs

It is possible to open an IRA with Vanguard with a $1,000 initial deposit (much lower than what many financial institutions require) if you invest it in Vanguard's STAR fund (VGSTX). The STAR fund is made up of 11 actively-managed Vanguard funds. It has a low expense ratio (0.37%), no redemption or 12b-1 fees. It is a moderate allocation fund (meaning that it couples moderate risk with moderate reward) with a 10-year return of 5.10% and a lifetime return of 9.75% (returns, of course, are not guaranteed). Vanguard charges no annual fee if you meet certain criteria; otherwise the fee is $20 per fund.

While it is generally agreed in the finance world that passively managed funds tend to perform better over the long run, and while the risk profile of this fund is not ideal for long-term investors, who can try to maximize their returns by investing in higher-risk funds, this is still a reasonable option for opening an IRA if you don't have a lot of cash. When you have more to invest, you can always switch your investment to another fund.

If you don't have $1,000 to invest, look at opening an IRA with Zecco. Zecco charges a $30 annual fee for IRAs but it has no minimum contribution.


No transaction fee ETFs

Charles Schwab and Fidelity both allow you to trade shares of exchange-traded funds for free, with a few restrictions.

Fidelity has an arrangement with iShares, the world's largest family of exchange-traded funds. This arrangement lets you trade shares of 25 popular iShares ETFs for free (meaning that you won't pay any commission fees) through a Fidelity account. These ETFs also have very low expense ratios.

The ETFs you can trade through this program include S&P 500 (IVV), Russell 2000 (IWM), MSCI Emerging Markets (EEM), and many others that compose various investment style strategies. The ETFs available represent a wide array of investment options, from large-cap value to fixed income, so you can take on the level of risk that's right for you and diversify your investments. The cost to invest depends on the price of a single share of the ETF you want to purchase.

Similarly, Charles Schwab lets you trade ETFs in its own family for free, if you do it online through a Schwab account. There are only a limited number of such options, but don't let the lack of choices deter you. These ETFs also have very low, competitive expense ratios and come in a well-diversified array of investment options. For example, the Schwab U.S. Broad Market ETF carries an expense ratio of 0.08%, significantly less than iShares, SPDRs and even less than the comparable Vanguard exchange traded fund.

Before You Invest
With these options, even the smallest of tax refunds can be put to good use. But if you have any high-interest debt, you'll get the best return on your investment from paying that off first. It's also a good idea to make sure your emergency fund has several months' worth of expenses in it before you start investing. (For more on making the most of your tax refund, read Don't Waste Your Tax Refund.)

If you're still feeling uninformed, check out last week's business highlights in Water Cooler Finance: My iPad Beats Your Toyota.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  3. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
  4. Mutual Funds & ETFs

    ETF Analysis: U.S 12 Month Natural Gas

    Learn about the United States 12 Month Natural Gas Fund, an exchange-traded fund that invests in 12-month futures contracts for natural gas.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Floating Rate Bond

    Explore detailed analysis and information of the iShares Floating Rate Bond ETF, and learn how to use this ETF as a defense against rising interest rates.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Short S&P500

    Find out information about the ProShares UltraPro Short S&P 500 exchange-traded fund, and learn detailed analysis of its characteristics and suitability.
  7. Mutual Funds & ETFs

    ETF Analysis: SPDR Barclays Investment Grd Fl Rt

    Learn more about the SPDR Barclays Investment Grade Floating Rate Fund, which tracks an index of highly rated floating debt securities.
  8. Mutual Funds & ETFs

    ETF Analysis: ALPS Medical Breakthroughs

    Learn more about a unique and innovative exchange-traded fund (ETF) in the biotechnology industry: the ALPS Medical Breakthroughs Fund.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares US Healthcare

    Learn about the iShares U.S. Healthcare exchange-traded fund, which invests in a wide range of health care providers, hospitals and home care facilities.
  10. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Duty Free

    Goods that international travelers can purchase without paying ...
  3. Qualified Longevity Annuity Contract

    A Qualified Longevity Annuity Contract (QLAC) is a deferred annuity ...
  4. Wealth Management

    A high-level professional service that combines financial/investment ...
  5. See-Through Trust

    A trust that is treated as the beneficiary of an individual retirement ...
  6. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
RELATED FAQS
  1. Can my IRA be garnished for child support?

    Though some states protect IRA savings from garnishment of any kind, most states lift this exemption in cases where the account ... Read Full Answer >>
  2. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  3. Can creditors garnish my IRA?

    Depending on the state where you live, your IRA may be garnished by a number of creditors. Unlike 401(k) plans or other qualified ... Read Full Answer >>
  4. How does an IRA grow over time?

    Individual retirement account, or IRA, growth depends on many factors, including what types of investments are included in ... Read Full Answer >>
  5. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  6. Can you buy penny stocks in an IRA?

    It is possible to trade penny stocks through an individual retirement accounts, or IRA. However, penny stocks are generally ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!