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Published March 2005
This
year, use tax refund
to help meet financial goals
If
you haven’t yet filed your taxes, you may think it’s too early to ponder
your refund. After all, you don’t even know if you’ll get one. But the
odds are in your favor; historically, about three-fourths of all taxpayers
receive refund checks. So, you may want to start planning for this “bonus”
today.
In fact, if you get
a refund and you haven’t thought about what to do with it, you may be
more likely to spend it — and then it’s gone for good. Why not use your
refund to help yourself make progress toward your key financial goals?
You might think that
your refund wouldn’t really be big enough to make much of a difference
in your life. But that’s not necessarily true. In 2004, the average tax
refund was about $2,300. What could you do with this amount? Here are
some ideas that could pay off:
- Contribute
to your IRA. In 2005, you can put in up to $4,000 (or $4,500 if
you’re 50 or older) to a traditional or Roth IRA (income limits apply),
so your $2,300 would put you more than halfway to the limit. It’s almost
always a good idea to fully fund your IRA, which offers substantial
tax advantages. Specifically, a traditional IRA’s earnings grow tax-deferred,
while a Roth IRA’s earnings grow completely tax-free, provided you meet
certain conditions.
- Pay down your
debts. Over the past few years, we’ve seen low interest rates in
a number of areas: mortgages, certificates of deposit, short-term bonds,
etc. But there’s at least one conspicuous exception to the low-rate
trend — credit cards. You could easily have one or more credit cards
that charge 11 percent interest (or more). If you could eliminate that
debt, you would, in effect, be earning an 11 percent (or better) return.
Consequently, you’d likely be making a pretty good “investment” by applying
your $2,300 toward your credit card debt.
- Save for college.
College costs have risen sharply over the past several years. To send
your children to college, you’ll want to save early and save often.
Fortunately, you can find several attractive college-savings vehicles,
including the Coverdell Education Savings Account and the Section 529
savings plan. You can put up to $2,000 per year to a Coverdell Account
— so your $2,300 is enough to completely fund your plan for 2005. Or
you might also want to consider putting your tax refund into a Section
529 savings plan. (Section 529 plan contribution limits are very generous.)
- Build an “emergency
fund.” If you don’t already have an emergency fund containing three
to six months’ worth of living expenses, you should consider creating
one — and your $2,300 will make a nice start. Once you’ve set up an
emergency fund, you may be able to avoid dipping into your long-term
investments (or taking on debt) to pay for short-term needs, such as
a major car repair or an expensive new appliance.
Use your refund
wisely
This year, when you get your tax refund, put it to work. By making the
right moves, you can reap benefits from your refund long after tax season
is over.
Eric Cumley is a Certified
Financial Planner and investment representative with Edward Jones in south
Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member
investment firm with more than 9,000 offices nationwide.
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