Wise Ways to Use Your Tax Refund
Wise Ways to Use Your Tax Refund
Visions of excess dance in your head as you await the arrival of a tax refund check from the IRS. This is “found money,” so you might as well spend it on something frivolous, right?
Not so fast! Tempting as it may be to use a tax refund for a shopping spree or an expensive night on the town, the smart move, say financial planning professionals, is to do something practical with at least part of it, while reserving the rest to spend on something fun.
Here, courtesies of the Financial Planning Association (FPA) in Denver, Colorado, are some of the best options for putting a tax refund to constructive use:
Put it toward retirement. Instead of instant gratification, think long-term by putting the money in a retirement Put the money in a Roth IRA or a traditional IRA, where it has an opportunity to grow over time tax-deferred or (with a Roth) tax-free, subject to IRA rules. Ask a financial planning professional if you need help evaluating, choosing and establishing a retirement account to house the money.
Use it to pay down a high-interest debt. Debt can mount quickly, especially on a high-interest credit card. Using a tax refund now to help get out from under a burdensome, fast-growing credit card balance will translate into greater financial freedom later.
Make a vacation allocation. You know what they say about, “All work and no play…” Deposit your tax refund into a CD or some other type of low-risk savings vehicle and earmark that money specifically to fund a fun vacation. If you put it in a CD, be sure it has a short enough term that you can take that money out penalty-free in time to use it for your vacation.
Strive for refund reduction. While it’s gratifying having the IRS send you money instead of vice-versa, the fact that you’re receiving a refund in the first place means you had too much tax withheld - which amounts to an interest-free loan to the U.S. government. Explains Jon L. Ten Haagen, a financial planner in Huntington, NY, “The bottom line is that you don’t want a big refund. Try to keep it under $500.”
To get below that threshold, talk to a financial planning professional and your employer, about ways to adjust your tax deductions, so you retain control of your money instead of Uncle Sam.
To find a financial planner in your area, check out the FPA’s national database at http://www.fpanet.org/PlannerSearch/PlannerSearch.aspx.
April 2011 — This column is provided by the Financial Planning Association® (FPA®) of Colorado, the leadership and advocacy organization connecting those who provide, support and benefit from professional financial planning. FPA is the community that fosters the value of financial planning and advances the financial planning profession and its members demonstrate and support a professional commitment to education and a client-centered financial planning process. Please credit FPA of Colorado if you use this column in whole or in part.
The Financial Planning Association is the owner of trademark, service mark and collective membership mark rights in: FPA, FPA/Logo and FINANCIAL PLANNING ASSOCIATION. The marks may not be used without written permission from the Financial Planning Association.
