What To Do With That Tax Refund

So your electronic fairy godmother (or if you still prefer snail-mail, Mr. Postman) finally got around to delivering that big, fat tax refund check you’ve been waiting for. Woo-hoo! You’re not alone, there’s a lot of woo-hooing going on these days. As proof, here’s some tax time trivia for you—according to Bankrate.com, last year (tax year 2008) over 96,000,000 taxpayers saw a refund from Uncle Sam worth an average of $2,683. That was up from 2007’s $2,371. Of the 131.5 million tax returns filed, over 73% received returns. Four out of five people say they expect a return this year.

The money’s in your account, now what? Your fellow taxpayers have ideas. Forty-four percent say they’ll pay down debt. Saving/investing is in the cards for 38%. Seven percent say they’ll use the newfound riches to purchase a big-ticket item. What about you? Here are some ideas:

• Blow it. Yep. Those words come from financial guru Liz Pulliam Weston. She’s a big believer that if you’re able to fritter away 10% of any windfall guilt-free, you’ll feel more responsible about what you do with the rest. If you go by the average return, that’ll give you $250 to play with. So take the family out to a nice dinner or the amusement park. New dress? New tool? Go for it! Remember, this is 10% and guilt-free!
   
• Pay down/off your credit cards. It’s boring. It’s not very romantic. But consider this, the average family carries a credit card balance that hovers just around $2,000 (according to the Federal Reserve). After blowing your guilt-free10% from an average tax return, that’s just about what you’ll have left! If you consider the average rate on a credit card is about 16%, the balance on your card is costing you over $300 a year in interest. If you can’t pay off the whole balance, at least pay it down, You’ll be doing yourself a tremendous financial favor.
   
• Fund your retirement. Everyone wants a little comfort for retirement, but you need to create a nest egg to help achieve it. That’s where a 401k* comes into play. You should fund yours at work to meet your company’s maximum match. Here’s a motivator: over a 40-year working career, an extra $2,200 a year could turn that nest egg into $850,000 (assuming an average annual return of 8%). How do you get your refund into your 401k, you ask? Here’s another tip from Ms. Weston. Ask your HR person to increase your 401k contribution so it comes to about $85 per paycheck. Deposit your refund in a savings account and have $85 transferred automatically every two weeks to your checking account for the next 12 months. If your employer doesn’t offer a 401k, contribute the $2,200 to an IRA.
   
• Build your emergency fund. Less than one-third of U.S. households have sufficient savings to get through three months of unemployment. If your retirement funding is already looking good, think about adding to (or creating) an emergency fund. We all have emergencies at some point (unemployment, vehicle repair, home repair), it will help you to sleep at night knowing you have enough funds on hand to handle an emergency without resorting to high-interest credit cards. Shoot for enough money to get your through at least 3-6 months of unemployment.
   
• Build a college fund. College costs aren’t getting any cheaper. Every dollar you save now will spare your children costs associated with student loan debts later. And, you may qualify for a state deduction for contributions made to some education planning options (consult your tax advisor for specific deductions). Two options include a state-run 529 college savings plan and a Coverdell Education Savings Account. Both are evolving programs, so for the latest news, visit the sites listed: Missouri’s 529 Plan, Illinois' Bright Start 529 Plan, or Coverdell Education Savings Accounts. You can also contact the Vantage Investment Services Group at 314.264.5350 or 800.522.6009 for help in education planning.**

Finally, the fact that you received such a substantial windfall isn’t necessarily a good thing. Sure, it feels nice getting money back at this time of the year, but the bottom line is, you just gave Uncle Sam an interest-free loan while you earned nothing—nada!—on YOUR money. Consider adjusting your withholding so your refund isn’t on such a grand scale. Check out a withholding calculator provided by the IRS.

Use the extra money in each paycheck to set up an automatic transfer into a savings account of your choice. Whatever you decide, remember, you can never go wrong by saving!

If you’re having problems making ends meet, Vantage is here to help. We’ve teamed up with Accel to offer members free money management advice.

_{*Investments in 401k plans are designed for long-term duration and premature withdrawals from these plans are subject to immediate tax consequences.
**If your state or your designated beneficiary's state offers a 529 plan, you may want to consider what, if any, potential state income tax or other benefits it offers before investing.
Accel Financial Counseling is not a registered broker dealer nor affiliated with LPL Financial.}