Tax Refund? Here Are a Few Things to Do With It
A few days ago I wrote about how to increase cash flow by reducing your withholding if you typically get a tax refund.
But most folks are getting a tax refund for their 2010 tax return now, and with the average refund at over $3,000, a lot of folks are going to need a few ideas on what to do with this cash.
Here are a few suggestions:
Pay off High Interest Rate Debt.
One of the best ways you can use your tax refund is to pay down credit card debt. Not only will you reduce your monthly credit card payments, but you can save money on the interest you would have paid. If you have several credit cards, pay off the one with the highest interest rate first, then work on paying down the next one.
Make a Deductible Contribution to an IRA.
If you qualify for the Savers Credit, you can make a $2,000 IRA contribution, get a $1,000 additional tax refund and save an additional $300 or so on your taxes. Think about it: by contributing $2000 to an IRA, you could receive $1300 in tax refunds! Dollar-for-dollar, this is the most valuable financial move for folks who qualify.
Contribute to a 529 College Savings Plan.
Open and contribute to a 529 College Savings Plan. These are state sponsored college savings plans, where the savings grow and can be used tax free when withdrawn for qualified education expenses. You may even receive state tax breaks if you contribute to your own states plan.
Pay off a 401k loan.
Increase the contributions from your pay and use the tax refund to make ends meet while the additional contributions are reducing your pay. You'll be glad you paid off this loan when you change jobs (or worse, loose one) as unpaid loans from 401k plans are taxable as income when you leave a job.
Build up Savings.
Use your tax refund to build your emergency savings or a fund for a down payment for a home. Park this cash in a high interest rate savings account that pays more interest than a typical money market mutual fund.
Make Extra Principal Payments on Your Mortgage.
By making just one additional payment on a 30 year mortgage each year, you can have the mortgage paid off in about 17 years and save thousands of dollars in interest over that time.
Invest in Yourself.
Use your tax refund to add to your education or job skills that can help to take your career and earning potential to the next level. Sign up for college or technical courses to learn new skills. If you're thinking of changing jobs, pay for a professionally prepared resume and attend a conference or a seminar where you can network with others in your field.
View all articles by Ray Martin on CBS MoneyWatch»
Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch.com and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.
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