Make your tax refund work for you
By Sandra Block
USA Today
If taxes are the price we pay for living in a civilized society, a big refund is our reward. And this year, the booty is bigger than ever. The average refund for tax returns filed through March 5 was $2,371, a 9 percent increase from the same period last year.
Refunds are interest-free loans you gave the government. Yet millions of Americans lowball their exemptions every year so they'll get a big check from the Internal Revenue Service. Many treat their refund like "found" money and spend it, a strategy heartily endorsed by the nation's retailers.
Here's a better idea: Put your refund to work. Instead of spending your refund on hardwood floors, use it to buy long-term financial security.
Some suggestions:
• Pay off debt: If you're carrying a credit card balance, paying off your debt will provide a guaranteed return on your investment. For example, suppose you have a $2,400 balance with an interest rate of 14 percent. If you make the minimum payments, it will take you 15 years to pay off your balance, and you'll pay nearly $1,900 in interest, according to Bankrate.com.
And whittling down your credit card debt is particularly important now. The Federal Reserve Board has signaled that it will continue to raise short-term interest rates this year, which will push credit card rates higher.
• Shore up your emergency fund: Financial experts recommend keeping six months' to one year's expenses in a safe place for emergencies, such as unemployment. In recent years, that's been a hard sell because interest on conservative investments, such as certificates of deposit and money market funds, has lagged behind inflation.
But rising interest rates are changing that.
• Hire a financial planner: For $2,400, you probably can't afford to hire a financial planner who will manage your investments and pay your bills. But you may be able to swing a financial checkup with a professional who charges by the hour.
Hourly rates for fee-only planners range from $150 to $300, says Sheryl Garrett, founder of Garrett Planning Network (www.garrettplanningnetwork.com), a nationwide group of fee-only planners who provide hourly advice. So for $2,400, you could buy eight to 16 hours of financial advice.
In that amount of time, a planner could review your retirement and education savings plans and help you figure out whether you're saving enough, she says.
• Invest in education: A big tax refund offers a way to jump-start a college savings account. One option is a 529 college savings plan. Every state now offers a 529 savings plan, and some let you deduct all or part of your contribution from state taxes. Contributions aren't deductible from your federal taxes, but withdrawals are tax-free as long as the money is used for college.
• Save for retirement: Invest in a more secure future by stashing your refund in an individual retirement account. You have until April 15 to invest up to $3,000 in a 2004 IRA, or $3,500 if you're 50 or older. The maximum contribution for 2005 is $4,000; $4,500 for those 50 and older.
