25 Feb 2014
- Written by Carlee McCullough
With W-2s and 1099s in hand, most folks expecting a refund are lining up to file those returns. The doors are open to the many tax preparers who have waited patiently for the season to arrive. Once the money arrives there are many things that can be done with those much-anticipated dollars. Plan to get the most out of the money and improve your financial position. So, let's discuss a few of the many options of spending the refund checks.
Checking, savings or money market account
One option is to save your refund check for a rainy day or emergency. Experts advise that savings should equal between three and six months of expenses for cushion in the event of layoffs or cutbacks. This rainy day or emergency fund is separate from other accounts to make sure that it is not spent or mingled with the rest of the funds. It is to be used for the mortgage, rent, car repairs and such in times of need.
Instead of spending every cent received, try placing some in a checking, savings or money market account. The Internal Revenue Service (IRS) through direct deposit will place your money electronically into your account as instructed. The IRS will even divide your refund over multiple accounts with the completion of Form 8888, which is the Allocation of Refund Form.
When sending money to multiple accounts make sure to use your tax preparer to insure that the correct boxes are checked on the tax form in addition to completing the Allocation of Refund Form. Verify that your bank, brokerage firm or credit union can and will receive direct deposits.
Savings bonds may be purchased in $50 increments up to $5,000.00.
IRA or 401k
Overall, most people do not feel that they are ever adequately prepared for retirement due to lack of a nest egg. Therefore, consider using part or all of the refund for placement in an Individual Retirement Account (IRA) or a 401k. Whether you choose a Roth IRA, traditional IRA, a SEP IRA or 401k, planning for retirement is always a positive thing because retirement will be approaching faster than expected. Make sure to speak with your tax preparer in order to receive proper credit in the proper year because the contribution has to be made by certain established deadlines to qualify as a prior year contribution.
Pay down credit cards and other debt
Many people are faced with paying monthly payments on credit cards and loans with high interest rates. Paying the minimum on the accounts simply allows the interest to build and the balance does not decrease by much. But paying larger sums on the credit cards or loans helps to decrease the repayment time and save on interest accruing.
Payment of rent or mortgage
Priority payments include rent, mortgage and/or car notes. So protecting your basic comforts by paying on them with the refund is never a bad decision. If you are renting, saving for a down payment on a home is also another possibility. Home ownership is an excellent way to build wealth and now is a great time to buy. Interest rates are low and bargain properties are plentiful in the marketplace.
Car – Repair or purchase
The decision to repair the old car or purchase a new car is a personal one that requires evaluation of several points. Is the refund enough to pay cash for the vehicle and not have a car note? Is the car note affordable? Can the old car be repaired reasonably and last a few more years? In order to save money it is best to repair the older vehicle, if the repairs are not too frequent and not costly. But if the old car constantly needs attention and repair, then it may be time to bite the bullet and purchase a newer vehicle.
Children's college fund
Whether you use a 529 College Savings Plan or simply place the money aside for the children's college, there is rarely enough money saved for this event. Starting early is wise. With the rising cost of college tuition, children need as much help as possible paying for school. The 529 College Savings Plan offers potential tax benefits and does not have to be spent in your home state. Speak to your tax preparer or financial professional for advice on setting up a 529 College Savings Plan.