Make The Most Of Your Tax Refund

Debt-Free America offers tips on how to make the best use of your tax refund this year.

SAN DIEGO (PRWEB) March 24, 2006 -- According to the Internal Revenue Service (IRS), in 2003 89% of filers received a refund and in 2004 the average tax refund was approximately $2,300. This year, you may be one of those individuals looking forward to that refund money, but why not use the funds wisely this year - instead of blowing it on a vacation, a new wardrobe or a shiny, new car to replace the one that is working fine.

First step: Analyze your current withholdings

While the news of receiving a lump sum of money may send you through the roof with excitement, you should analyze your withholdings for the new year to avoid the same mistake of over-withholding – which means giving your money to Uncle Sam interest-free for a year – money that you could put to good use each month. Consider talking with your human resources department about changing your W-4 for next year. And talk with your tax professional about what they recommend as well.

Even though you’ve now changed your withholdings, the question still remains: how should you use your refund to your best advantage? Debt-Free America offers tips on how to use your lump sum tax refund money:

Use your refund toward unsecured debt

Put the refund money toward debts. Paying toward credit card balances is a good option for two reasons. First, using the refund toward your credit card balance improves your credit rating, because the closer your balance is to the credit limit the worse your credit score. If you have more than one credit card with a balance it is better to pay a little on as many cards as you can versus paying off one card completely. Secondly, paying toward your credit card allows you to save money in accruing interest charges.

Plan for your child’s future: Use the refund for a college 529 savings plan

The 529 plan is a state-sponsored savings plan designed to help families set aside funds for future college costs. The benefit of this plan is that earnings and withdrawals are tax-free, and distributions from a 529 savings plan this year do not impact a student’s financial aid eligibility next year. There are no income limitations or age restrictions with this plan so everyone is eligible to take advantage, of the 529 plan and all members of the family can donate.

Deposit the funds in an IRA account

Use your refund to set up or contribute to an existing IRA account. A traditional IRA accounts allows you to defer taxes on the money you earn until you start withdrawing the money from the account in retirement. These earnings may also be deducible from your taxable income each year. If you open a Roth IRA, you will not pay taxes on the income you earn. Whether a traditional or Roth IRA is best for you depends on your own financial situation, which includes your tax bracket, other income sources and other investments. It is best to talk with your tax professional for recommendations.

Purchase mutual funds

A mutual fund allows a group of investors to pool their money together and a fund manager is responsible for investing that money into specific securities, usually stocks and bonds. When you invest in a mutual fund, you are buying shares or portions of the mutual fund and become a shareholder of the fund. By pooling the money together, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. The bonus is that mutual funds are extremely low risk investments and an easy way to turn your tax refund into more money.

Purchase a CD account

A certificate of deposit (CD) essentially is a risk-free and short-term investment and allows banks to borrow money from their consumers, with interest. When you open a CD, you agree to deposit a specific amount of money into the account for a specific amount of time, and during the time the money is in the fund you will earn interest. At the end of that specified time, your balance is returned to you along with the interest you earned. The downside of CD’s is the rate of return, or the interest accrued, is usually low, and you cannot withdraw the money while it’s in the CD.

Pay down your mortgage and/or increase your home’s value with home improvements

Making a lump sum payment to be applied to the principal on your home mortgage can save you money in the long-term because mortgages are usually our largest and longest debt. Even a small payment toward your mortgage can make a difference. Consider the following statistic: A $1,000 payment on a $100,000 mortgage at a rate of 7% would save you over $4,000 over the life of the loan.

Also, using that money toward home improvements will ultimately affect the bottom line in terms of your home’s value. According to www.contractorfind.com, in some markets updating and remodeling kitchens and bathrooms will add the most value to your home with the master suite coming in at a close third. These projects are estimated to return more than 100% of the cost of the improvements, if the home is sold within a year. If the home is kept longer, returns on these investments continue to increase.

Beef up your emergency fund

Last but not least, use the tax refund money toward beefing up your emergency fund. This fund can be used in case of a lay-off, unexpected medical condition or disability or additions to the family, like a child or aging parent. The emergency fund should cover three to six months worth of basic living expenses.

For more information about credit counseling, and to get the facts about their services, please visit www.debtfreeamerica.com or call toll-free at 1-888-268-2626. Financial advisors at Debt-Free America are available to discuss your budget, expenses, and other financial matters with you at no cost. They have had years of training and education in the budgeting and credit card industry and are available to use as a free resource.

WHO:      

Debt-Free America

WHAT:   

Tax Refund Tips: How To Maximize Your Return Dollars
            
WHEN:   

Interviews are available immediately and ongoing

WHERE:   

In-studio or phone interviews with local Debt-Free America counselors

Debt-Free America is a 501(c)3 non-profit, community service organization offering confidential and professional credit counseling, debt management programs, and financial education to consumers nationwide. Debt-Free America is dedicated to providing FREE services to help financially distressed families and individuals effectively manage their personal finances. Debt-Free America is also dedicated to giving back to their community by volunteering, sponsoring non-profits and in their seminar messages. The Board members and operations staff have a long-term commitment to helping anyone in debt crisis, and even those not in a debt crisis. Debt-Free America has been in the business since 1997 and is now serving over 16,000 clients nationwide.

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