Money Matters: Using your tax refund wisely
- Sunday, 05 February 2012
- Written by Steve Borklund
So your 1040 is filed and you are now anxiously waiting for your tax refund. What do you plan on doing with it? Go on that long-awaited cruise, get a new set of golf clubs, or buy that widescreen TV you’ve had your eye on?
According to the Internal Revenue Service, over 75 percent of American taxpayers receive a federal tax refund, with the average being around $2,500. It’s what you do with your refund now that may create a better financial picture for you and your family in the future.
Instead of spending your refund this year, consider contributing to an Individual Retirement Account (IRA), setting up a college savings fund for a child, or paying down credit card debt. These options will help improve your financial situation.
First on your list of priorities might be paying down any high-interest credit card debts you have incurred. By paying only the minimum each month, you may be paying just the interest (or less) on the debt and little or nothing towards the principal. Paying down the debt can help free up additional money for other important financial needs.
If debt is not a problem, your tax refund could provide you an excellent opportunity to contribute to an existing IRA or establish a new one.
Making a tax-deductible contribution to a traditional IRA is an option if you are not participating in an employer-sponsored retirement plan or, if you are participating, your Adjusted Gross Income falls within eligibility guidelines. A Roth IRA may be a better choice, if you are eligible to contribute. Contributions to a Roth IRA are not tax deductible. However, qualified distributions are received free from federal income tax.
Your refund could also be used to contribute to your child's college savings. There are simple and affordable options you can take advantage of today, including tax-advantaged savings vehicles, to help you reach your college savings goal.
One thing to remember after you’ve decided the fate of this year’s refund: the check you received is not a windfall, but the return of an interest-free loan you provided the government.
Regardless of the pleasure you may get from receiving a large check each tax year, adjusting the amount withheld by the government to reduce the amount of future refunds may be an appropriate course. You might not get a refund in April, but there may be more money in each paycheck to contribute to a savings account or IRA or to pay down debt throughout the year.
Take some time to consider your options before making the down payment on that big purchase you may be considering. The earlier you start saving for your future, the more you may have during your retirement.
If you have questions about these options and others, you owe it to yourself to contact a financial services professional that you know and trust. Your financial future may depend on it.