What Are You Doing with Your Tax Refund?

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Are you saving your tax refund?

The April 17th tax deadline will be here before you know it.

I should be getting around to filing our tax return in the next few weeks.

This year, thanks to our little tax deductions (our two girls) and my estimated tax payments, we just might be getting a decent sized refund.

If you work for someone else, you should adjust your W-4 to get the proper refund.

I’m normally a fan of managing the with-holdings such that you don’t get too much refund.

But I admit it’s nice to get a little money back.

I’m not sure where you find yourself today, but check out these two posts if you’re having trouble paying or filing your taxes:

• What if You Can’t Pay Your Taxes this Year?
• What if You Can’t File Your Taxes?

In the past, we’ve used our tax refund money to help fund our Roth IRA contributions. I guess technically we used money from our bank account to fund the Roth IRA. But those funds will be quickly replaced by the tax refund.

Did you know that if you don’t already contribute to a 401K and meet the income requirements you can increase your tax refund by contributing to a traditional IRA?

What to Do With Your Tax Refund

You see (above) what I’m doing with my tax refund, along with my standard recommendation. But let’s look at some other things you can do with your tax refund.

Start an Emergency Savings Fund – Everyone needs an emergency fund to help them through a tough financial situation, like a job loss, car accident, or medical emergency. You need an emergency fund to create that cash cushion between you and your need for credit to solve the problem.

The standard advice is to shoot for about six months of living expenses. I think that’s fair, especially if you have two incomes in the home and your jobs are fairly stable. Know your risk though and make sure your emergency fund is big enough based on you.

If you’re looking for a place to open up an emergency fund, look no further than an online savings account.

Get Rid of Debt – Debt stinks. It causes stress and wastes money due to the high interest payments. Get rid of it. Make a solid plan to get out of debt (i.e. debt snowball) and get it paid off as quick as possible. A big tax refund could really wipe out a bunch of debt.

If you’ve just got mortgage debt, consider making a principal-only payment.

Save Money for Other Short-Term Goals – An emergency fund is a good starting point, but surely you have other short-term savings needs. Can you think of any reasons you’ll need a large chunk of cash in the near future? Here are a few ideas to get you started:

• new or used car
• major car repairs
• trip or vacation
• boat or motorcycle
• downpayment on a home
• furniture
• improvements to your home
• new clothes

Don’t go into debt to afford life’s upcoming necessities and pleasures. Use your tax refund.

Saving for Retirement – My favorite (best) thing to do with your tax refund is to do what I did, use it towards retirement savings. If you have a 401K through your employer, you could stash the funds there.

Many people use their tax refund to open an IRA. You guys know I love these. You can open them on your own with an online stock broker and you can control just about everything that happens with the money there, unlike your 401K.

Of course, there are the tax benefits that come along with saving for retirement with your tax refund. You could actually increase your return if you contribute to a traditional IRA, or SEP IRA (or even a Solo 401K) if you’re self-employed.

Save for College Expenses – Some people choose to use their tax refund to open up a 529 college savings plan for their child(ren). Money that goes into your 529 plan can grow tax-free as long as it’s used for qualifying expenses.

As long as you choose a “savings” plan vs a “prepaid” plan, your child(ren) can use the funds at any college or university that they want.

Go Back to School – Use your tax refund to go back to finish or start a degree. I love seeing people invest in themselves. Do it for fun, or see it as a way to increase your earning potential at your current (or future) employer.

Start a Business – Now you have the cash to start that business you’ve always wanted. You can tell someone is really passionate about their business idea when they self-fund the thing like this. Using your own money to start a business is definitely a better idea that taking out some business loan or borrowing from your relatives.

Use it for Charity – If the tax refund is a surprise to you, then why not use it to help a worthy cause. There’s definitely some organization that could use the funds more than you. If you do decide to give, use a qualifying charitable organization and get a deduction next year on your taxes.

If you haven’t filed your taxes yet, you can do so with any of these reputable tax software companies:

• TurboTax
• TaxACT
• H&R Block at Home Online

There are lots of things you could do with you refund: save, spend, give.

What do you plan to do with your refund? If you already spent the money, what did you spend it on?

Image by TaxBrackets.org

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