Suggestions on Using Tax Refund
May. 18, 1999
Q. I'm fortunate to be getting an income tax refund this year. Any suggestions on how I can put it to good use?
A. First, some advice on what NOT to do with it: Don't blow it all on fancy dinners and indulgent purchases.
Financial advisors say taxpayers should look to their refund checks as a means of making headway on long-delayed goals, such as paying down debt, opening an Individual Retirement Account or saving for their children's college education.
The average refund check this year is $1,500, which is 15 percent higher than last year. It also happens to be just under the $2,000 annual limit for IRA contributions.
``It's found money,'' says Judith Perry, a vice president and personal financial consultant at Merrill Lynch in Milwaukee. ``It's been a kind of forced savings, and people should continue saving it according to their own priorities.''
If paying down debt is a goal, individuals should focus on the debt that carries the highest interest rates, such as credit cards. Paying off a mortgage, where interest rates are generally low these days and the interest payments are tax-deductible, should be further down on the list, according to financial advisers.
Investing is another good option. For many, that means putting money into a mutual fund of stocks or bonds.
The type you choose depends on many variables, such as age. For younger people saving for retirement or college costs, a more aggressive stock fund would be appropriate, Perry says. Those closer to retirement should choose a more conservative fund, such as a balanced fund or bond fund, she says.
But what about a little shopping spree, you might ask.
``I think you should postpone that until you win the lottery,'' Perry says.