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Now that we are in the midst of tax
season, you may be anticipating a tax
refund, if you have not already received
one. Of course, not everyone receives a
refund, but, among those who do, the
amount can be sizable. In fact, in 2005,
the average tax refund was about $2,125.
If you are going to get a refund, start
planning now on how to use it. By making
the right moves, you can help speed up
your progress toward your financial
goals.
What should you do with your
refund? Here are a few ideas:
Put the money in your IRA.
To achieve a comfortable retirement
lifestyle, you will need to draw on a
variety of financial resources, one of
which may be an IRA. In 2006, you can
contribute up to $4,000 – or $5,000 if
you are 50 or older – to a traditional
or Roth IRA. If you received a $2,125
refund, last year's average, you would
be well on your way toward maxing out on
your IRA contribution.
If you think that this
amount will really make that much of a
difference to your long-term savings,
consider this hypothetical situation: If
you put that $2,125 in an IRA that
earned 7 percent a year and you never
invested another dime in your account,
your money will still grow to more than
$16,000 in 30 years. Not a fortune, to
be sure, but nothing to scoff at. And in
all likelihood, you would not just make
a one-time contribution to an IRA. (At
the end of 30 years, you do have to pay
taxes on your earnings, but by then, you
may be in a lower tax bracket; even if
you are not, you might be able to spread
the tax burden over several years. And
if you had invested in a Roth IRA, your
earnings will grow tax-free, provided
you've had your account for at least
five years and you do not begin
withdrawals until you are age 59-1/2.)
Keep in mind that these rates are
hypothetical only and do not reflect the
rates of any investment currently
available.
Contribute to a Section
529 plan. Many people contribute to
Section 529 plans to save money for
their children's (and grandchildren's)
college education. You can put in large
amounts each year to a Section 529 plan,
and your earnings will grow tax-free,
provided withdrawals are used for
qualified higher education expenses.
Pay down high-rate debt.
Short-term interest rates have been
rising over the past few months. This
could mean that you'll be paying a
higher rate on your credit cards, which
probably carried a fairly high rate to
begin with. If you use some of your tax
refund to whittle down this debt, you
will be making a wise move, as this debt
is typically not tax deductible, and,
therefore, of no benefit to you.
Build up your rainy day
fund. You might want to use your tax
refund to build your emergency fund.
Generally speaking, you should set aside
six to 12 months' worth of living
expenses to pay for expenses such as car
repairs, new appliances and unexpected
medical bills.
You cannot always count on a
tax refund, but when you get one, make
the most out of it. You will be glad you
did.
(Mullinger can be
reached at Edward Jones on Wake Union
Church Road.) |
