Six Savvy Strategies for your Tax Refund

Besides looking at the calendar, you can tell tax season is on the way when:

A. You start receiving income statements in the mail to file with your tax return.

and B. You start thinking about what you'll do with a tax refund.

In a 2009 Associated Press-GfK poll, only 35% of people who expected a refund planned to save and invest it, despite the annual drumbeat of financial experts who urge all Americans to do just that.

Before you take the money and run, see if you can set aside a portion, if not all, the refund. Here are six smart ways to handle the windfall:

1. Boost your emergency savings accounts.

You should have an emergency savings fund to cover at least three to six months of living expenses in case of job loss, and many experts advise an even larger reserve fund, given what they've seen in the recent turbulent economy. Emergency savings should be in liquid vehicles, such as savings accounts or money market accounts.

Have your refund deposited directly into your savings so you don't have a chance to spend it. All you have to do is include your financial institution account number and nine-digit routing on your tax return.

Not sure you can put the entire amount into savings? You can also split your refund into as many as three financial accounts. Use IRS Form 8888, which includes instructions on how to designate the money.

2. Add to your retirement investments.

If you're over 50 and are worried about retirement, it's time for some savings catch up. The Employee Benefit Institute says almost half of Americans 55 and older reported total retirement savings and investments of less than $50,000 -- clearly not enough. Federal tax provisions let you put extra money toward 401(k) and IRA plans. Check with your financial advisor to determine the best way to invest your tax refund for retirement.

3. Make investments in savings bonds.

This year for the first time the IRS will let you buy savings bonds with the direct deposit feature when you file your income taxes. Include IRS Form 8888 and tell the IRS you want part or all of your refund to go toward purchasing Treasury I bonds. The bonds must be purchased in $50 multiples.

4. Invest toward mid-range goals with best CD rates.

Thinking about a major home repair in a few years? Perhaps you want to buy a car. Invest your refund in a certificate of deposit to earn interest on your money in the meantime. Shop around for the best CD rates and choose terms that match your goal. (Don't buy a 7-year CD if you plan to repair the roof in three years.)

5. Pay down high-interest debt.

You'll save a bundle if you pay down balances on credit cards, many of which have interest rates of 18% or more. Use your refund to take a big bite out of credit card debt, particularly if you've been paying just the minimum due each month.

6. Add to college savings accounts.

Direct the refund into your children's college funds, or start funds if you haven't gotten around to it yet. If your kids are already grown with little ones of their own, open a college fund for your grandchildren. With college expenses rising every year, they'll need all the help they can get. Talk to a financial advisor about the best way to invest. In general, you should opt for more conservative strategies, such as CDs, if the timeline is short, five years or less, versus riskier but potentially more profitable strategies, such as mutual funds.


Susan Tompor • Old financial wisdom is new again in 2010 • philly.com • http://www.philly.com/philly/business/personal_finance/011210_old_wisdom.html
Kimberly Lankford • 5 Smart Uses for Your Tax Refund • Kiplinger • http://content.kiplinger.com/columns/ask/archive/2009/q0319.htm
Associated Press-GfK • AP-GfK Poll on Income Taxes • http://www.ap-gfkpoll.com/pdf/AP_GfK_Poll_Taxes_041009.pdf
Employee Benefit Research Institute • retirement Confidence Survey •  http://www.ebri.org/files/FS-04_RCS-09_Age.FINAL.pdf
IRS • Taxpayers Can Now Use Refunds to Buy Savings Bonds; New Direct Deposit Option • http://www.irs.gov/newsroom/article/0,,id=217791,00.html
Dave Copeland • Despite planners' advice, many spend tax refunds • boston.com • http://www.boston.com/business/personalfinance/articles/2009/04/29/despite_planners_advice_many_spend_tax_refunds/

Your Investments: 5 Things To Know About Variable Annuities

The market for variable annuities has undergone a shakeout in the wake of the turbulent economy, and now life insurers are unveiling redesigned products.

A variable annuity is a personal account designed to build retirement savings. Both fixed and variable annuities are sold by life insurance companies. A fixed annuity, like a certificate of deposit, offers a guaranteed rate of return. Variable annuities are riskier than fixed annuities, but they provide potential for greater returns.

Money in a variable annuity is invested in portfolios similar to mutual funds. Most variable annuities also offer a fixed interest rate account as well. Your money grows tax-deferred in annuities, and then when you're ready to retire you can decide how to take out the money. Variable annuities offer a wide range of payout choices, including payments for the rest of your life, like a pension.

You can choose from a wide range of guarantees, although the Wall Street Journal reports that consumers may face fewer investment choices as insurers lower their risks. Also reported by the Wall Street Journal: Companies are redesigning their products to be simpler and easier to understand--a good thing for you as an investor.

Still, variable annuities feature many different facets. They remain complex investments that require careful research. Here are five things to keep in mind before you invest:

1. Weigh the Costs

Fees can make variable annuities more expensive than investments like money market accounts or certificates of deposit, particularly when generous riders, such as a guaranteed minimum income benefit, are added. Financial experts advise against variable annuities as short-term investments--any time frame less than 15 years because it will take at least that long for the tax-deferral benefits to make up for the cost in fees.

2. Max Out Other Retirement Plans First

Annuities have no IRS investment limits, so they might be a good option if you've maxed out annual contributions to your other retirement savings accounts. But financial experts advise against annuities if you're not already investing as much as you can in other options. Why? Those other vehicles, such as IRAs and 401(k)s, provide you the same tax-deferral benefits without the high fees of annuities.

3. Understand Insurance Protection Limits

Like FDIC insurance for savings accounts, there is protection for annuities in case the insurance company fails, but the coverage amounts vary depending on where you live. Coverage is at least $100,000 in most states. You can learn about coverage guarantees in your state at the National Organization of Life & Health Insurance Guaranty Associations.

4. Know the Rules

Annuities are complicated and come with many features and guarantees, so make sure you discuss the various options in depth with your financial advisor. Many people who invest in annuities fail to understand completely how they work. Make sure you separate facts from sales pitches. Remember that the person selling the annuity makes a commission and has a vested interest in you purchasing the annuity.

5. Don't Forget About Early Withdrawal Penalties

Annuities are designed for building retirement nest eggs. Because they allow you to accumulate earnings tax=free until the time you pull money out, you pay a 10% penalty if you withdraw money before age 59 1/2, just as you would if you withdrew money from a certificate of deposit or other investment that's part of a retirement account.


Insured Retirement Institute • What is a Variable Annuity •  http://www.irionline.org/consumers/article/id/167
Leslie Scism • Redesigned Annuities Abound • Wall Street Journal • http://online.wsj.com/article/SB10001424052748704162104574630600739241492.html?mod=googlenews_wsj
Insured Retirement Institute • 2009 Annuity Fact Book •  http://www.irionline.org/pdfs/09AnnuityFactBook/chapter6.pdf
Cameron Huddleston • What to Ask Before Buying an Annuity • Kiplinger • http://kiplinger.com/basics/archives/2002/04/story25.html

How to Gauge Your Risk Tolerance and Why It's Important

Risk varies widely among investments--from dependable and safe money market accounts and certificates of deposit to speculative futures and options trading--and the ability to handle risk varies just as widely among investors.

Just how much money are you willing and able to lose if an investment goes sour? The answer is your risk tolerance, and it's an important factor to determine as you craft your financial strategy.

Its also an issue gaining attention in the wake of a turbulent market and economy. Three-quarters of financial advisers polled in November 2009 by Brinker Capital, an investment management firm, reported a disjunction between clients' perceived and actual levels risk aversion. Many people who thought they could tolerate risk in the stock market cracked once the economy and market tanked.

Determining your risk tolerance is tricky because it combines your financial capacity for risk with your comfort level for risk, and both of those can change over time. Here are four questions to get you started thinking about risk tolerance.

1. Your Investments: When Do you Need the Money?

As a general rule of thumb, your risk tolerance is lower if your time frame is shorter, say five years instead of 20 or 30 years. That's why financial experts advise parents to move at least some of the money they're saving for their children's college educations out of the stock market and into other vehicles, such as certificates of deposit, once their kids become teen-agers. If you're investing for the long term, you can be more aggressive. However, that doesn't mean just because you're nearing retirement that you have to move all your money to money market accounts and CDs. With a rapidly growing number of people living into their 80s and 90s, you very well could be investing for a 20-year or longer time frame.

2. What Are Your Investment Goals?

What are you investing the money for, and what do you hope to accomplish with the investment? Remember to keep your goals realistic and in line with one another. You can't realistically expect a 12% annual return without bearing any risk. Higher returns mean increased risk. The safer the investment, the lower the payoff. If you don't have the stomach for the risks you need to take on to accomplish your goals, then it's time to re-evaluate your goals, boost your savings, or step out of your comfort zone (as long as you have the financial capacity to do so).

3. How Much Are you Worth?

If you've got high net worth--total assets minus liabilities--and a pile of money you can invest without sacrificing your lifestyle, then you can stand to lose more than someone who's living paycheck to paycheck. Don't be tempted by risky investments, such as futures, if you have little or no net worth. Sure, those high-risk moves can pay big rewards, but you can also lose everything, and with little or no net assets, you can't afford to lose. Plus, when too much is at stake, you're not likely to make the best decisions.

4. What's Your Investment Personality?

Personality is a factor in investing. Some people love the thrill of the high wire, while others prefer to walk through life comfortably on solid ground. These traits impact how you invest your money. Investments shouldn't keep you up night after night. If you can't stand to take risks, then your investment approach should trend toward more conservative choices. A good financial advisor can talk to you about your risk tolerance and may have you fill out a risk tolerance questionnaire.

Two university personal finance professors, Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at Kansas State University, developed an investment risk tolerance quiz. Questions range from personality queries, such as how your best friend would describe you as a risk taker (possible answers include "a real gambler, willing to take risks after completing adequate research, cautious, or a real risk avoider") to how comfortable you are investing in stocks and stock mutual funds. The professors are among experts researching how to develop better instruments for testing risk tolerance.

Of course a quiz can't tell you what investments to make, but it may provide some good food for thought as you think about your financial moves going forward.


George Mannes • How much risk can you stand? • money.cnn.com • http://money.cnn.com/2009/10/07/pf/risk_tolerance.moneymag/index.htm
Paul Sullivan • Here's $50 Million; What's Your Risk Tolerance? • The New York Times • http://www.nytimes.com/2009/07/10/your-money/asset-allocation/10wealth.html
Michaela Cavallaro • VOICES: Cathy Pareto, On Managing Risk • • http://blogs.wsj.com/http://blogs.wsj.com/financial-adviser/2010/01/06/voices-cathy-pareto-on-managing-risk/
Securities and Exchange Commission • Determine Your Risk Tolerance •  http://investor.gov/determine-your-risk-tolerance/
Mary Rowland • How to assess risk tolerance • MoneyCentral • http://articles.moneycentral.msn.com/Investing/SimpleStrategies/HowToAssessRiskTolerance.aspx
Investopedia • What is the difference between risk tolerance and risk capacity? • http://www.investopedia.com/ask/answers/08/difference-between-risk-tolerance-and-risk-capacity.asp

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Disclaimer:This content is not provided or commissioned by American Express. Opinions expressed here are author's alone, not those of American Express, and have not been reviewed, approved or otherwise endorsed by American Express. This site may be compensated through American Express Affiliate Program.

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