It’s easy to get excited at tax time when you find out you’ll be getting a refund from the IRS–especially if it’s a large sum of money. The prospect of taking your family on a dream vacation, purchasing that 60-inch LCD television you’ve had your eye on, or going on a shopping spree at the mall all seem like great ways to spend the money. But what about doing something a bit more practical with your refund, such as putting it towards improving your overall financial picture?
While it may not seem as exciting as a vacation to a tropical island, consider putting your refund in a tax savings vehicle such as a retirement or education savings plan. To make it even easier for you, the IRS allows direct deposit of refunds into a variety of accounts, including IRAs and Coverdell education savings accounts.
Another option is to pay down any existing debt you may have, especially if it is in the form of credit card balances that carry high interest rates. Paying off any outstanding balances will reduce the interest you pay each month in addition to the total interest you’d pay over the long term–freeing up money to work for you in more beneficial ways, such as saving and investing.
You may also consider putting your refund towards increasing your cash reserve. It’s a good idea to have at least three to six months’ worth of living expenses in your cash reserve. Without adequate savings, a period of unemployment or an unexpected illness could be financially devastating.
Keep in mind that a refund is essentially an interest-free loan from you to the IRS. If you find that you always end up receiving an income tax refund, it may be time to adjust your withholding. When determining the correct withholding amount, your objective should be to have just enough withheld to prevent you from incurring penalties when your tax return is due.
Finally, to avoid any surprises at tax time (either in the form of a refund or tax bill due), it’s a good idea to periodically check your withholding, especially when your lifestyle or employment circumstances change. Visit www.irs.gov for more information.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013