Money Management
FOR IMMEDIATE RELEASE: April 25, 2005
HERE’S HOW TO USE YOUR TAX REFUND WISELY
If you recently received or are expecting a tax refund, you’ve
probably already thought of a dozen different ways to make the
proceeds swiftly disappear. But before you do, consider this: a tax
refund is not found money. It’s your hard-earned income that you
lent to the Internal Revenue Service, interest-free. Here is some
advice from the Kansas Society of CPAs about how to use your refund
to improve your finances.
PAY DOWN DEBT
With interest rates on credit cards averaging between 13 and 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 one or two
smaller debts, you may get more satisfaction out of paying them off
in full.
FUND YOUR RETIREMENT
Consider investing all or at least some of your tax 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
refund amount. Then, use the money in your bank account to make up
for the smaller amount in your paycheck.
ESTABLISH OR REPLENISH AN EMERGENCY FUND
As a general rule, CPAs say you should 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.
SAVE FOR COLLEGE
Another option for your tax refund is saving for your child’s
education. Section 529 college savings plans allow parents to save
for their child’s education in state-sponsored plans. Some states
even provide tax breaks for deposits into these plans.
DO SOME PREVENTIVE MAINTENANCE OR IMPROVEMENTS
Are there some minor repairs you could make today that would
spare you a larger expense down the line – for example, a new roof
for your house or tires for your car? Consider using your tax refund
for these purposes or for making home improvements with a high
payback value, such as adding landscaping or upgrading a bathroom.
DONATE TO CHARITY
Use your refund check to give in to your charitable urges. When
you donate to a charity, you not only help someone in need, but the
amount of your contribution can be deducted on your tax return for
2005. Just be sure to get a receipt from the charitable
organization.
TAKE A VACATION
If you’ve been working hard all year and saving regularly, a
well-needed vacation may be in order. Spending quality time with
your family is a good investment, as long as you are not under any
other financial strains.
DON’T LET IT HAPPEN AGAIN
Remember -- receiving a large tax refund means you lent Uncle
Sam your own money interest-free. File a new W-4 form to lower your
withholding and you’ll receive more money in each paycheck. Invest
the extra dollars in your company retirement plan, an IRA, or a
mutual fund.
CONSULT WITH A CPA
Make an appointment for some financial planning advice. It’s a
great way to make your refund pay off.
This article is provided as a public service of the Kansas
Society of CPAs.
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