Sure-fire ways to make your tax refund work for you
If you’re expecting a big tax refund, you’ve probably already thought of a dozen different ways you could use the money.
But, before you blow that check on a closet full of shoes, consider this: A tax refund is not found money.
It’s actually your hard-earned income that you lent to the Internal Revenue Service, interest-free.
So, why not use it to improve your finances?
Here’s some advice from the North Carolina Association of Certified Public Accountants:
1. Pay down debt
With interest rates on credit cards averaging about 14 percent, paying down your debt is one of the smartest things you can do with your refund check.
Generally, it makes the most sense to pay off high-interest debt first.
However, if you have two or more smaller debts, you may get more satisfaction out of paying bills off in full.
2. Fund your retirement
Consider investing all or at least some of your refund in a tax-favored retirement account.
With a traditional IRA, your earnings grow tax-deferred and if you meet certain eligibility requirements, your contribution may be tax deductible.
Contributions to a Roth IRA are not deductible, but withdrawals are tax-free if certain conditions are met.
You can’t put your tax refund check directly into your 401(K) plan at work, but here’s a good strategy for taxpayers who aren’t contributing the maximum: Deposit your refund in the bank and increase your contributions by a percentage that roughly equals the amount of the refund.
Then, use the money in your bank account to make up for the smaller amount in your paycheck.
3. Establish or replenish an emergency fund
As a general rule, CPAs suggest you have six months’ worth of living expenses set aside in case of a job loss or unexpected emergency. If you don’t, use some of your tax refund for this purpose. Keep these funds in a liquid investment, such as a money-market fund, and withdraw only for true emergencies.
4. Save for college
Another option for your refund is to sock it away for your child’s education.
There are even state-sponsored savings plans, and some states even provide tax breaks for deposits into these plans.
5. Do some preventive maintenance or improvements
Are there some minor repairs you could make today that might spare you a big expense later?
For example, a new roof or fresh tires may help you avoid repair costs down the line.
Or, consider using your refund to make improvements that raise the value of
your home, such as adding landscaping or upgrading a bathroom.
6. Donate to charity
Use your check to do good. When you donate, you not only help someone in need, but also the amount of your contribution can be deducted on your 2007 tax return.
Just be sure to get a receipt from the organization.
7. Take a vacation
You’ve worked hard all year. Spending quality time with your family is a good investment, as long as you’re not under any other financial strains.
8. Don’t let it happen again
Remember: Receiving a large refund means you lent Uncle Sam your own money at no interest. File a new W-4 form to lower your withholding and you’ll get more money each paycheck. Invest the extra dollars in your company retirement plan, an IRA or a mutual fund.