5 Things You Can do with Your Tax Refund
By Deborah Jeanne Sergeant
Tax season is upon us. Do you know what you’ll do with your tax refund? Splurging on a trip or a kitchen renovation may seem like a fun way to spend the windfall, but before you go on a spree, consider advice from Randy L. Zeigler, certified financial planner and private wealth adviser with Ameriprise. Zeigler offers a few ideas that are a little more practical:
1. Make college more affordable.
“Fund a NY 529 College Savings account for a child or grandchild,” Zeigler said.
Even if the young person has already enrolled in college, it’s not too late to open an account. As the owner of the account, you receive a tax break on anything you contribute. Others can contribute to the plan as well. The funds may be used for expenses related to private K-12 education (although not for homeschool) or college. This can include books, equipment, room and board and tuition. If the beneficiary does not end up attending college, the funds may be rolled over to another relative or into a Roth IRA. But in any case, the funds are not forfeited. Withdrawals for another purpose face a 10% penalty.
2. Invest in your retirement.
“Open or add to a Roth IRA for the previous year until April 15 or the current year depending upon when it is received,” Zeigler said. “Contributions are subject to maximum funding limits based upon annual earnings level and owner’s age.”
Roth IRAs are considered a solid savings vehicle for retirement. There’s no fee for opening an account. Since it’s money that has already been taxed, the money grows tax-free. Once you’re age 59 ½ and if the account is at least five years old, you can draw on the account without taxation or penalties.
3. Reduce debt.
“Apply the amount to reduce outstanding debt balances, ideally paying off one entire debt balance and then applying that former payment to one of the owner’s other loans to accelerate that repayment as well,” Zeigler said. “Use the snowball method to pay off the smallest one first and then keep applying the monthly cash flow as each loan or credit card is paid off toward the retirement of the other balances until all short-term debts are repaid.”
Interest paid on revolving debt such as credit cards piles up quickly, so paying off debt is a great idea to save money. Paying down your mortgage is also a great strategy, as it’s ideal to go into retirement without a mortgage.
4. Save for a rainy day.
If you don’t have an emergency fund, now’s the time to start one. Zeigler said that an emergency fund can “pay for unexpected expenses that arise, like surprise appliance repair or replacement, auto transmission or engine replacement, tree that falls down in your yard, or unplanned medical expense to avoid taking on debt for a short-term need in the future.”
Paying for these expenses with a credit card racks up more debt fast and can lead to years of credit debt bondage.
5. Have some fun.
“When all of the other things above are done, then spend the amount on something you need or want,” Zeigler said.
Consider what will build memories or make your life easier.