Smart ways to put your tax refund to work

Smart ways

to put your tax refund to work

The average

tax refund check issued in 2002 was for more than $1,900, according to

the Internal Revenue Service. While tax refunds are not windfalls you've

actually given the IRS an interest-free loan of your hard-earned money

you should think carefully about how you plan to use this money.

When

it comes to making your tax refund work for you, there's no one right

answer for all families, says the Georgia Society of CPAs. For some, paying

off debt will provide the greatest peace of mind. Others might find a

new investment is the way to go.

For

others still, the freedom to spend some money without worrying about upsetting

the monthly budget provides a much-needed psychological boost. The important

thing, say CPAs, is to carefully think through the best use of your tax

refund before spending it impulsively.

If

you're paying double-digit interest rates on credit card debt, using your

refund check to pay down your debt makes excellent financial sense. In

fact, there's a double benefit for you. Not only do you eliminate or reduce

the amount you owe on your credit card, but you avoid additional interest

payments which add to your debt. CPAs recommend that you pay off the credit

cards with the highest interest rates first.

As

a general rule, CPAs and other financial professionals recommend that

you set aside three to six months of living expenses to carry you though

an adverse event, such as a layoff or illness. If you don't already have

an emergency fund, your tax return can help you get one started.

Just

be sure to keep the money in a fairly liquid investment, such as a money

market account or short-term CD.

good place to invest your refund check is in a retirement account, where,

over the years, even a small contribution can make a big difference. If

you've been putting off opening an IRA until you had "a little extra

money," here's your chance.

tax refund also can be a boon for workers with 401(k)s. For example, if

you are contributing 3 percent to a 401(k) plan that allows you to put

in more, consider increasing your contribution rate. You can use your

tax refund to help offset the extra amount being taken out of your paycheck.

If

saving money from your weekly paycheck is difficult, investing your tax

refund check can give you a jump-start on creating an investment portfolio.

You might want to start with a mutual fund that has a low minimum opening

deposit.

If

you have an existing portfolio, your refund check provides a good opportunity

to invest in a new stock or to improve the diversity of your portfolio.

For

many taxpayers, making an extra payment toward the principal on your mortgage

makes better financial sense than putting the money in a savings account.

Trimming an extra $500 or more off your principal now can save you thousands

of dollars in interest payments over the next 30 years.

Here's

another option: if you've been thinking about refinancing your home mortgage,

but didn't have enough cash to cover closing costs, your tax refund check

can bring you closer.

Using

your tax refund for an important purchase, such as a new computer or a

major appliance, rather than buying it on credit, means you'll avoid interest

payments and have more money in your monthly budget to save or spend on

necessities.

If

you've got kids headed for college, you might consider earmarking that

tax refund check for an Education IRA. In 2003, qualified taxpayers can

deposit up to $2,000 in an Education IRA per beneficiary. Section 529

plans are another great way to save for future college bills. Under new

legislation, earnings in such funds can be withdrawn tax free if used

to pay for qualified education expenses.

You

might also think about using your refund check to help the less fortunate.

Not only will you help someone in need, but the amount you donate can

be deducted on your tax return for 2003. Be sure you get a receipt for

your donation from the charitable organization.

For

some, a tax refund is a windfall to be spent on something exciting and

unexpected. If you've worked hard all year and saved diligently, you might

just want to put the money toward a well-deserved vacation.

Even

a brief escape can reenergize you, and that's a better return on your

money than a pile of cash register receipts.

Finally,

depending on the size of your tax refund, you may want to consider contacting

your CPA for some financial planning advice. You can then apply the refund

to specific financial goals.

Back

to Business Home Page