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Make a plan for using tax refunds before you file

April 05, 2001

April 05, 2001

Make a plan for using tax refunds before you file



Many of us hustle this time of year to get our taxes together, especially if we're expecting a refund. Have you planned how you will use your tax refund?

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Using your refund to pay off bills is generally a great idea, especially if the bills carry a high interest rate. Do you carry a balance on your credit cards from month to month? The average credit card debt for cardholders with a monthly balance is $3,000. At 18 percent interest, you must pay nearly $300 a month to pay that off in a year. With lower monthly payments, it will take even longer to pay off the debt, resulting in increased interest charges. Using your tax refund to pay down your credit card balance will help you pay off the debt faster - and save a lot in high-interest finance charges.

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Another plan for your refund could be to consider making additional investments for retirement. That strategy may gain you more in the long run. You might consider using your tax refund to make an annual IRA contribution. A Roth IRA is particularly attractive because while the contribution is not tax deductible, the money is tax-free at retirement. The sooner you begin saving for retirement, the more time your money has to grow, and the bigger your retirement fund will be.

Before you are tempted to use your refund to make special purchases, ask yourself how your emergency savings fund is doing. If you don't have some money available for unexpected expenses, then every unplanned expense - such as a medical bill, home maintenance or car repair - becomes a source of serious stress and possibly a source of new debt.

Work toward having enough emergency savings to get you through a month if your income was cut off. If you already have that in place, then build additional savings that could be easily available through a higher-interest method, such as a money market fund or a series of certificates of deposit, laddered so you have one coming due every month or two. That way, you will have access to some money without having to pay a penalty for early withdrawal.

A tax refund is not a windfall. It means you have been overpaying your taxes all year - giving the government free use of your money. If you regularly get a large tax refund, check with your employer about adjusting your withholding. That will put more money in your paycheck each payday or let you increase your contributions to your retirement savings plan.

Lynn F. Little is a family and consumer sciences extension educator for Maryland Cooperative Extension, Washington County. Maryland Cooperative Extension programs are open to all citizens without regard to race, color, sex, disability, age, religion or national origin.

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