Tax Refunds: Five Wise Ways to Work Your Windfall

Tips on spending your tax refund - investing in yourself and the markets!

Tax Refunds: Five Wise Ways to Work Your Windfall

A recent report announced that average income tax refund jumped by 10% to $3,036 last year. What does this mean for you? Very little, but it seemed like a sure fire way to get you reading my first article on Best Cash Cow.  A future story will actually discuss why a smaller refund may be better for your wallet – watch out for that hook!  With that said, I would like to take this opportunity to share some suggestions on smart ways to spend your tax refund this season.

First, take 10 percent and spoil yourself.  Book a massage, plan a dinner out or treat yourself to that new plasma.  Enjoy it, savor it, get it out of the way — and then prepare to invest in yourself! 

Deposit your refund directly into your retirement saving account. Think of it like this: If you receive a $1,500 tax refund this year and invest in an account with a rate of return of 7.5 percent, in 45 years, your refund will transform into $38,857.26. Which would you rather have: a small trip to Cancun, or $39,000? Given that it’s already Spring Break season, you may be reading this in Mexico.  Well, maybe next year!

 

Donate it to a charity of your choice. If one of your goals is to donate to a good cause this year, use this opportunity to give one large gift to a cause close to your heart.  Your donation is tax deductible so be sure to keep your receipts and ensure the charity of your choice has a 501(c)(3) designation. The tax benefits of donating can be significant: if you itemize your deductions and fall in the 25% tax bracket, a $1,000 donation can net you a cool $250.

Contribute to a Section 529 Plan.  If you have or plan to have children in the near future, establishing a 529 Plan may be an excellent strategy to help them pay for college. You can contribute virtually any amount – best of all, the earnings grow tax-free, the money you withdrawal for higher education expenses is tax-free, and you may even qualify for a state tax deduction for the amount you contribute!  This is one of the most tax-friendly savings vehicles out there today. (Please note: a 529 plan could impact a beneficiary’s ability to qualify for financial aid.)

Pay down your debt. If you have run up credit-card, home-equity or other debt, your tax refund may provide a relatively painless way to eliminate or reduce what you owe. One big benefit to whittling down debt is the interest savings: credit cards are charging 14% annual interest on average these days.  For example: a $10,000 credit card bill will cost you an extra $5,155 in interest payments and take you over 8 years to eliminate if you continue paying the monthly minimum. How many Mexico trips is that? In addition to costly interest charges, credit card companies are looking for ways to boost income in the midst of the recession by raising late fees and other costs.  To find the most affordable credit card deals, visit the Credit Card section on this site: https://www.bestcashcow.com/credit_cards/credit_card_reward_programs.html

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