So your 1040 is filed and you are now anxiously waiting for your refund. What do you plan on doing with it? Go on that longawaited cruise, get a new set of golf clubs or buy that widescreen TV you’ve had your eye on? There are so many ways you could spend your refund , but there may be better alternatives to consider.
According to the Internal Revenue Service, over 75 percent of American taxpayers received a federal tax refund, with the average around $2,000. It’s what you do with your refund now that may create a better financial future for you and your family later on. Instead of spending your refund this year, consider funding an Individual Retirement Arrangement (IRA), setting up a college savings fund for a child, or paying down credit card debt. These options will help to improve your financial situation.
First on your list of priorities should be paying down any high-interest credit card debts you have incurred. By paying only the minimum each month, you may be paying just the interest (or less) on the debt and little or nothing towards the principal. Paying down the debt can free up additional money for other important financial needs.
If debt is not a problem, your tax refund could provide you an excellent opportunity to fund an existing IRA or establish a new one. For the 2004 tax year, you can contribute up to $3,000 to an IRA. If you are 50 years or older by December 31, 2004, you can add an additional $500 to the account.
Making a tax-deductible contribution to a Traditional IRA is an option if you are not participating in an employersponsored retirement plan or, if you are participating, your Adjusted Gross Income falls within eligibility guidelines. A Roth IRA may be a more appropriate choice, depending on your eligibility. Contributions to a Roth IRA are not tax deductible. However, qualified distributions are received free from federal income tax.
Your refund could also be used to fund a Coverdell Education Savings Account (ESA) or 529 Plan for your child. Contributions are not deductible, but withdrawals to pay qualified educational expenses are free from federal income tax.
One thing to remember after you’ve decided the fate of this year’s refund: the check you received is not a windfall but the return of an interest-free loan you provided the government.
Regardless of the pleasure you may get from receiving a large check each tax year, adjusting the amount withheld by Uncle Sam to reduce the amount of future refunds may be an appropriate course. You may not get a refund in April, but you may have more to each paycheck to contribute to a Coverdell ESA, 529 plan, IRA or to pay down debt throughout the year.
Take some time to consider your options before making the down payment on that cabin cruiser. The earlier you start saving for your future, the more you may have during your retirement.
If you have questions about these options and others, you owe it to yourself to contact a financial services professional that you know and trust. Your financial future may depend on it.
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( Published on January 10, 2009 in Asian Journal Los Angeles p. C6 )
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