Spend Your Tax Refund Wisely

Tax Planning

Download This Article

Spend Your Tax Refund Wisely


Spend your Tax Refund Wisely
Rick Bloom


It's that time of year that many of you are going to begin to receive tax refunds from the Internal Revenue Service and the State of Michigan.  Most people will put the refund in their checking account and before they know it, it will evaporate.  In these difficult economic times it makes sense to have a game plan as to what you will do with your refund.  I sort of look at tax refunds as a bonus because if you're smart with the money, it'll definitely pay dividends down the road.


            With regards to tax refunds, my advice for most people is to use their refund to pay down charge card debt.  On average, Americans are paying 18.5 percent interest on their charge cards and that is not tax deductible.  Therefore, by paying down your charge card you're getting at least an 18.5 percent return on your money and I can't think of any investment that can give that type of guaranteed return. 


            In paying down charge cards, keep in mind that not all charge cards are the same.  The interest rate you pay on charge cards can differ dramatically.  Therefore, before you pay down a charge card, make sure you're paying down the right one.  Basically, the right charge card to pay off is the one that you're paying the highest rate of interest on.  In addition to the financial benefit of paying down a charge card there is also the benefit you get from being able to sleep at night.  I've always found that people with less debt seem to be more at ease with their financial situation.  Therefore, as far as I am concerned the best thing you can do with your tax refund is to pay down your charge card. 


            For those of you lucky enough not to have charge card debt, another great alternative for your tax refund is to put the money away for your retirement.  If you qualify, you can invest the money in an IRA, Traditional or Roth.  Or, if you are maxed out on what you can contribute to IRAs, you can still invest the money for your retirement.  For example, you may take that money and use it to do a Roth conversion.  In other words, you can take Traditional IRA money and convert it to the Roth money and use your tax refund to pay the additional taxes. 


            I've always been a believer that you can never save too much for retirement.  As I've mentioned in the past, retirement is a brand new concept in the history of mankind and therefore, as you enter retirement you're entering the great unknown.   One way to assure yourself of a comfortable retirement is to have sufficient financial resources.  That is why I encourage people to use tax refunds to save for their retirement.


            If you have children or grandchildren whose college education you would like to save for, another alternative for your tax refund would be to use it to set up an education account such as the Michigan Education Savings Plan.  After all, with all the budget cuts here in Michigan and around the country, there is no doubt that the cost of a college education will continue to rise.  Therefore, setting up an education account with your tax refund can go a long way in helping with someone's college education.


            As a side note, anyone who reads this column knows I'm a fan of the Michigan Education Savings Plan.  The beauty of the Michigan Education Savings Plan is it does not take a lot of money to start.  In fact, you can start a plan for as low as $25.  Therefore, it doesn't matter what your tax refund is, you can establish an account.


            One last consideration regarding your tax refund is the amount of cash and short-term resources you have available to you.  I've always been a believer that every individual needs three to six months of emergency funds.  That is, three to six months of living expenses that you keep liquid in case of emergency.  This is a great time to look at your emergency cash needs and if you do not have enough in your emergency fund, your tax refund can be used to supplement that.


            According to an article I read, tax refunds should be very generous this year.  In other words, many people are going to get significant refunds.  While it is rare, in this economy, for people to receive bonuses from their employers, that is exactly what a tax refund is.  Therefore, be smart with it and make sure you have a game plan to use it wisely.   Good luck!

Download This Article

Rick Bloom Newsletter

Add your email address to subscribe.

Connect with Us