Splurge or save: What to do with that tax refund | SierraSun.com
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Splurge or save: What to do with that tax refund

Christine StanleySierra Sun

Grumble and moan: Its tax time. But for more than two-thirds of people filing, doing taxes means getting money back. Its like Christmas in April, and recipients who spend or invest their refund wisely can celebrate the benefits in the long run.The average tax return this year is about $2,400, according to the Internal Revenue Service. And while it might be tempting to splurge for a plasma television or a trip to Bermuda, finance pros say that the smartest move is to invest that hard-earned cash.I would advise (refund recipients) to diversify, said Sierra Sun financial columnist Peter Trummer.Trummer, a money manager and investor with Western International Securities in Truckee, said consumers who want to get aggressive with their money should invest in the Templeton Mutual Discovery Fund or in the Templeton China World Fund.[China] is a really high-growth area of the world, if you want to get aggressive with your money, Trummer said. The benefits are that the U.S. economy is growing at about a 4 percent rate, but some of the Asian economies are growing at 8 or 9 percent.Investors looking for a more conservative option might want to consider the Franklin Income Fund, Trummer said.Its a nice conservative place to invest, and it generates nice cash flow. Its a good fund for retirees as well, he said.Young professionals looking to get started on their savings should consider an IRA or Roth IRA, according to Trummer. It reduces your tax liability, he said. Say you are making $30,000 year, and you put $4,000 into an IRA. Now youre only showing $26,000 to the government. The IRA gets to grow tax deferred until you touch it.Paying down debt remains a high priority for most, with nearly half of those who expect a tax refund planning to use the check towards debt, according to a survey conducted by the National Retail Federation. More than one-third anticipate putting some of the money into savings, while one-in-four will put the money toward everyday expenses.But not all consumers are able to resist splurging. According to the survey, 10 percent of consumers will dedicate a portion of their return to either major purchases or a vacation.

Reduce high-interest debt. Put that refund toward a credit card balance carrying a 14-percent interest rate and youve guaranteed yourself a 14-percent return on your money. And keep it paid down once you do. Lowering high-interest consumer debt is one of the best financial moves you can make. Establish an emergency fund. Nearly 60 percent of the households in America with children under age 18 live paycheck to paycheck, according to a recent survey by MetLife. A pool of rainy day cash to meet emergencies would be welcome news for them. Put it into a retirement plan. One in four eligible workers doesnt participate in his or her employers 401(k) plan, according to several studies, and many more workers dont fund their plan sufficiently to earn all of their employers match. Use other retirement accounts. No 401(k) plan or other employer-sponsored plan at work? There are always individual retirement accounts, and if youve maxed out contributions to those accounts for the year, consider tax-efficient mutual funds or maybe annuities. The self-employed have even more options, including solo 401(k)s, simplified employee pension plans and Keogh plans. Put it toward college. Invest it in a college account for your children. The younger they are, the more years the refund will have to grow. Consider investing in the tax-free growth of a 529 college savings plan, a Coverdell education savings account or U.S. savings bonds. Make an extra house payment or save for a down payment. Knocking off a chunk of your mortgage principal can save you thousands in interest over the long run. But accelerating mortgage payments isnt always the best move, depending on your current mortgage rate and investment alternatives. You might want to consult a planner before making this use of your refund. Buy additional or new insurance. Do you need additional disability coverage or perhaps long-term care insurance? While youll need to be able to keep the premiums up in subsequent years, the refund might at least get you started. [In household file in computer] Have fun. OK, keep at least a little of it to have fun with or spend it on something that you want instead of need. Source: The Financial Planning Association


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