Best Places To Put That Tax Refund You Are Getting.

Of course, the ideal thing to do is to not get one at all but that’s a different story…it seems most people I know are getting a refund this year of at least a few thousand dollars. Not us, we owe money due to a withholding error at my last job. Nice, huh?

Anyways, I came across this article this morning that lists the best uses for your tax refund and thought I would share:

Fund your IRA

Whether you have a Roth or a traditional IRA, you’re allowed to make up to a $4,000 contribution ($5,000 if you’re 50 or older) for tax year 2006 through April 17 this year. Or, if you can’t make that deadline, you can make your 2007 contribution with it.

Fund a 529

Socking money away for a child’s college education is one of the harder financial demands of parenthood. But at least in a 529 you may get a tax deduction for your efforts. (Note – We don’t have a kid and we have money in one of these already. Never too late to start saving, college is only getting more expensive!)

Open a CD

If you’re going to need money – say, for a down payment on a home or car – in the next year-and-a-half or two, you might opt to put your refund in a 1-year CD. Rates have been pretty favorable – averaging 5.4 percent of late, which is about double the rate of inflation.

Add to your emergency fund

There’s nothing less fun – or harder to save for – than a rainy-day fund worth three months of your expenses to protect you if ever you’re laid off or face a large unexpected expense like a broken down car or furnace.

The best place to house your emergency fund: a high-yield savings account. (Note – we use INGDirect and have been incredibly happy with them. Our emergency, general and vacation accounts are all with them!)

Reduce your credit card debt

If you’re carrying high-rate debt – defined as a rate higher than any rate you’re getting on your savings accounts – reducing or eliminating your balance sooner rather than later can save you a bundle long-term.

If you want to put your refund to use in more than one way, the IRS is now offering a split-refund option, which lets you designate up to three accounts at financial institutions into which you want the IRS to direct deposit portions of your refund. To activate this option you’ll need to fill out Form 8888 and send it in along with your tax return. (Note – This should be priority #1 if you are getting a refund, pay down those balances!)

Like I said earlier, the idea is not get a refund at all. I know some people treat the IRS like a savings account; spending every year hoping that they get that big refund. But here’s the thing – you are not earning any interest on that money for the ENTIRE year..you are allowing the IRS to make your interest and keep it!

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Comments (2)

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  1. […] My Two Dollars discusses the best places to put that tax refund you are getting. […]

  2. Chris B. says:

    I’m not happy about this, but I still have a car payment. I plan on paying down the principal balance on my car loan with my refund. I recommend buying a car without financing. If you do have to finance though, use your tax refund to pay the loan down if the interest rate is high.