3 Great Uses for that Tax Refund and a Bonus Tip for Next Year

April 15th is fast approaching and CPAs across the country will collectively breathe a sigh of relief once they’ve filed the last of the tax returns for their clients. If you haven’t filed your 2012 tax return yet, there’s not much time left to get it done (unless of course you file for an extension). If you filed your return and you received a refund (or are expecting a refund), it’s easy to think of it as “found” money and to use it for carefree spending on things you may not need. Marketers and advertisers are relentless in their quest to get you to use your refund to buy a new TV, the next hot gadget, or even a new car. But are there better ways to put your tax refund to good use? You bet! Consider one or more of the following options.

Boost Your Savings

If you don’t have an emergency cash reserve of at least three month’s living expenses, consider funding your savings account with a portion of your refund. Ally, American Express, andDiscover all have great high-yield savings account options available that pay better interest rates than what most local banks are willing to pay.

Pay off debt

There’s a great sense of freedom and accomplishment in achieving debt-free status. If you have credit card debt, auto loans, student loans, or other debts hanging over your head, consider jump-starting your debt snowball by using your tax refund to pay down your smallest balance debt.

Fund a Roth IRA

Roth IRA’s make great savings vehicles for retirement. You make contributions of after-tax money today and never pay taxes again on the investment gains (as long as you don’t withdraw gains until you’re at least 59 1/2 and made your first Roth IRA contribution at least 5 years prior to the first distribution). You can easily set up and fund a Roth IRA at the investment custodian of your choice. A few of the custodians our clients typically work with are Fidelity, TD Ameritrade, and Charles Schwab.

Bonus Tip for Next Year

If you’re consistently getting large tax refunds year-after-year, consider adjusting your allowances for tax withholding on your W-4. That way, you’ll keep more of your hard-earned money in your pocket each pay period rather than extending an interest-free loan to the government!

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