4 Ways to Spend Your Income Tax Refund

March 7, 2014 12:00 am

Christine H. Canapari, ChFC®

Senior Financial Advisor & Manager of Client Services

Are you one of the 75% of taxpaying Americans who will get a refund this year?  That number seemed surprisingly high to me since I’ve always been taught that overpaying or having too much withheld for taxes was basically lending Uncle Sam money interest-free.  While I do agree that having that extra money in your paycheck to use how you see fit is a better option, there are circumstances when I find it acceptable to overpay and receive a refund.  I am actually comfortable with having my clients have more than necessary withheld if it will prevent them from spending that extra money if they were to otherwise receive it in their paycheck.  Of course, my preference would be for them to be saving those funds.

If you will be getting a refund, you are now faced with the decision of what to do with it.  If you thought you were going to get the okay to book that Disney vacation, put the down payment on a new boat or car this blog will surely disappoint you.  Instead I would like to extend some suggestions on ways to use the money which will unfortunately not give you instant gratification, but instead provide you with some financial stability sometime in the future when you may need it.

Pay Off Debt

Paying off debt is probably my top choice of how to spend your tax refund.  Is there a bit left to pay on your car or school loans, or do you have credit card debt hanging around on your balance sheet?  Mortgage debt excluded, I love the idea of wiping out or making a substantial dent in outstanding loan balances.  Even if you have loans at 0% interest, they will need to be paid back at some point.  Why not work at getting them paid off sooner, thereby allowing you to invest or use the money being allocated towards that debt for a more productive purpose?  With debt paid off, you can concentrate on other areas of your retirement plan or portfolio that need attention.

Fund your Emergency Reserve

I can’t think of a better way to spend your tax refund if you don’t already have an adequate reserve in place.  Establishing or beefing up an emergency fund will save you from taking on debt and landing in financial trouble when unexpected expenses arise such as a home or car repair, job loss or an illness.  All too frequently I see people who fall into financial hardship because they didn’t have adequate or any funds available in an emergency situation, and they wind up using credit cards to pay for it.  Generally emergency reserves need to be funded over time and replenished after a need arises and the funds are accessed.  Depositing your refund can be a great opportunity to get your emergency reserve fund to the proper amount or level.

Make a Traditional or Roth IRA Contribution

For this option you will, of course, need to adhere to IRS eligibility rules, but if you meet the requirements, this is another great option for your tax refund.  For 2014, those under the age of 50 are eligible to contribute $5500 to an IRA with a catch up provision of $1000 additional for those over 50 years of age.  If you have already maxed out your 401k or other retirement savings account and are eligible, a Roth contribution is a great option to invest in your future and avoid future taxes if using the funds for retirement.  If you are eligible for a deductible traditional IRA contribution, you will be saving for your retirement and saving yourself money in taxes as well.

Fund a 529 College Savings Plan

I find that the thought of saving enough money to cover college costs for many parents can be overwhelming.  The rate at which college costs are rising each year seems to have no end in sight.  Unfortunately, some feel that fully funding college is so out of their reach, that they disregard it all together.  While it may be unrealistic for all parents to fully fund college for their children, there is a huge benefit to having some savings lined up to cover tuition and other costs.  Saving early on gives the investment the opportunity and time to grow, and the benefit of the 529 plan’s tax deferred status makes choosing the 529 vehicle a valuable choice.

If all of these items are adequately funded because you have been saving throughout the year and are still getting a tax refund, then by all means the Disney trip is on.  If not, please consider one of these avenues as a way to set yourself up for a more secure future and financial peace of mind.

Chrissy Canapari serves as Financial Advisor and Manager of Client Services at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at ccanapari@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Chrissy’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.