Use your income tax refund wisely

Published 4:15 pm Wednesday, January 19, 2011

By ANTHONY BERRYMAN / Guest Columnist

So your 1040 is filed, and you are now anxiously waiting for your refund. What do you plan on doing with it? Go on that long-awaited cruise, get a new set of golf clubs or buy that widescreen TV you’ve had your eye on?

There are so many ways you could spend your refund, but there are other alternatives to consider.

According to the Internal Revenue Service, more than 75 percent of American taxpayers received a federal tax refund, with the average around $2,500. It’s what you do with your refund now that may create a better financial future for you and your family.

Instead of spending your refund this year, consider contributing to an Individual Retirement Account (IRA), setting up a college savings fund for a child or paying down credit card debt.

First on your list of priorities might be paying down any high-interest credit card debts you have incurred. By paying only the minimum each month, you may be paying just the interest (or less) on the debt and little or nothing towards the principal. Paying down the debt can help free up additional money for other important financial needs.

If debt is not a problem, your tax refund could provide you an excellent opportunity to contribute to an existing IRA or establish a new one.

Making a tax-deductible contribution to a traditional IRA is an option if you are not participating in an employer-sponsored retirement plan or, if you are participating, your Adjusted Gross Income falls within eligibility guidelines.

A Roth IRA may be a better choice, if you are eligible to contribute. Contributions to a Roth IRA are not tax deductible. However, qualified distributions are received free from federal income tax.

Your refund could also be used to contribute to your child’s college savings. There are simple and affordable options you can take advantage of today, including tax-advantaged savings vehicles, to help you reach your college savings goal.

One thing to remember after you’ve decided the fate of this year’s refund: the check you received is not a windfall but the return of an interest-free loan you provided the government.

Adjusting the amount withheld by the government to reduce the amount of future refunds may be an appropriate course. You might not get a refund in April, but there may be more money in each paycheck to contribute to a savings account or IRA or pay down debt throughout the year.

Anthony Berryman is an Alabaster State Farm Insurance agent.