Six Savvy Strategies for your Tax Refund

Barbara Marquand | guest writer for GoTalkMoney

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/

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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