Put Your Refund to Good Use
Are you expecting a tax refund from the IRS this year? Although it may be tempting to spend your refund on the newest electronic gadget, consider using it to meet one or more of your financial goals.
Pay Down Debt
Credit card debt can grow quickly if left unpaid. Credit card interest typically accrues at a relatively high rate. Any unpaid interest is added to the principal balance each month, and interest then accrues on the new, higher balance. And on top of that, interest on personal credit card debt is not tax deductible.
You also may want to consider allocating part of your refund to an unpaid car loan. Like credit card interest, interest on a personal car loan is not tax deductible.
Save for Retirement
The longer you delay saving for retirement, the less time you'll have to benefit from any investment gains on your savings. You might consider using your tax refund to cover current expenses and then allocating an equivalent amount to a pretax retirement savings plan, such as a 401(k). This way, you would reduce your taxable income for the year and increase your investable savings, which can potentially compound tax free until you retire. With this strategy, compounding works for you rather than against you.
Add to Your College Funds
Although the IRS does not allow a deduction for contributions to a Section 529 college savings plan account, the tax law does provide that any earnings on your contributions will be tax deferred and ultimately tax free if applied to qualifying education expenses.
Create an Emergency Fund
Consider putting aside part of your refund in an account you can easily access to pay for unexpected expenses, such as car or plumbing repairs.