Tax Refund Advice
For lots of people this time of the year filing their federal and state tax returns, a potential tax refund brings a pleasant financial windfall. According to recent data from the IRS, the average federal refund in Louisiana is roughly $3,000. But what should you do with it? Here is a bit of tax refund advice.
The easy answer is to splurge on a large purchase (vacation, shopping spree, etc.). The key, however, is to have a plan for the money before it hits your checking account and gets absorbed into everyday spending. Here are a few money-smart ideas:
- Pay down debt – Never a bad idea. If you have outstanding student loans, credit card balances, auto or other consumer loans, use the one-time inflow to knock down those balances and save on the interest.
- Save – Take the opportunity to easily boost your emergency fund. Too many adults do not have enough in liquid savings in the event of an emergency. Three to six months of your household expenses is a great place to start.
- Invest – If you are out of debt and have plenty in the emergency fund, another option is to invest in yourself (your retirement) or others (kids’ education perhaps). Contributing to an IRA is a convenient way to make a one-time retirement contribution.
If looking to fund higher education expenses, get with your financial adviser and look into which account may be right for your situation. There are Education Savings Accounts, 529 plans and UGMA/UTMA accounts to name a few.
- Give – This one may not beef up your portfolio or net worth directly. However, if in a position to give to charity (deductible on next year’s taxes as a bonus), a friend in need or another cause you are passionate about, you may be surprised by the rippling effect from your small act of generosity.
Bonus strategy – Remember that your tax return is simply a refund of what you overpaid the government. If you are getting back large refunds each year, you may want to consult with your tax adviser on whether adjusting your withholding or estimated payments may be to your benefit. Why give Uncle Sam your money to hold all year when you could be using the extra during the year to tackle some of the strategies above sooner?