Posted by : Daniel Stoica in (Blog, Tax Refund) On: May 22nd, 2011
Tagged Under : 401(k), 529 Plan, auto loans, CARD Act, CD, charity, contribution, credit cards, Daniel Stoica, donate, education expense, emergency fund, employer, expenses, high-interest debt, home improvements, investment, IRS, personal loans, Roth IRA, savings, short-term bond, tax deduction, Tax Refund, traditional IRA, travel, unemployment, vacations
What’s the best use of your tax refund?
Financial experts say it makes sense to pay down any high-interest debt; this means your credit cards. The next debt to pay down would be auto and personal loans. American Express found that almost 40% of taxpayers plan to use their refund to pay down debt or pay bills.
Experts recommend getting rid of credit card debt because lenders have been known to use the CARD Act as an excuse to raise interest rates. If you pay down your credit card debt at 18 or 20 percent, it’s like getting a return on your investment for the same amount.
Create or add to an emergency fund. The economic recovery is still bleak so it’s a good idea to be cautious about potential unemployment. If your job is at risk, it is important to have some kind of savings. Your highest investment priority is cash on hand. The American Express survey found 30% of those polled plan to save their refunds.
If you haven’t put anything aside for retirement, start contributing to your company’s 401(k), especially if your employer matches your contribution amount. The best way to figure out how much to put into a 401(k) is to take the amount of your tax refund, divide by the number of pay periods per year, and contribute that amount each paycheck.
For those whose employers don’t offer a retirement plan, you might consider putting your tax refund in a Roth IRA. It offers more flexibility than a traditional IRA. The only downside to a Roth IRA is that there is not enough time to make your money back if stocks experience major losses. It might be best to stay with CDs and short-term bonds.
You can also put the money in a 529 plan. It will grow, tax-free, and can be withdrawn, tax-free, if the money is used for qualified education expenses. Each state may have its own plan that may offer up front tax deductions for the contribution.
Another great option would be to donate to charity. Researchers conducted a study by giving participants money. They instructed one group to spend it on themselves and the other group was to spend it on others, such as buying a friend a gift or contributing to charity. The second group reported a much bigger boost in happiness and fulfillment. Even in tax season, it may be better to give than receive.
Finally, 22% of taxpayers said they plan to indulge with their refunds on such things as: home improvements, vacation/travel and large purchases. As long as you have sufficient savings to meet any unexpected expenses, you may, of course, your refund any way you want.
No matter what you chose to do with your tax refund, research your options and decide where your money will benefit you, or others, the best.