By ANNETTE MAPES
State Farm
So your 1040 is filed and you are now anxiously waiting for your refund. What do you plan on doing with it? Go on that long-awaited cruise, get a new set of golf clubs, or buy that widescreen TV you have had your eye on?
There are so many ways to spend a refund, but there are other alternatives to consider.
According to the Internal Revenue Service, more than 75 percent of American taxpayers receive a federal tax refund, averaging around $2,500, and what they do with their refunds now can create a better financial future.
Instead of spending this year's refund, taxpayers should consider contributing to an Individual Retirement Account, setting up a college savings fund for a child, or paying down credit card debt. These options will help improve one's financial situation.
First on the list of priorities might be paying down any high-interest credit card debts. By paying only the minimum each month, the cardholder may be paying just the interest (or less) on the debt and little or nothing toward the principal. Paying down the debt can help free up additional money for other important financial needs.
If debt is not a problem, a tax refund can provide an excellent opportunity to contribute to an existing IRA or establish a new one.
For the 2009 tax year, anyone can contribute up to $5,000 to an IRA. People 50 years or older by Dec. 31, 2009, can add an additional $1,000 to the account.
Making a tax-deductible contribution to a traditional IRA is an option for someone who is not participating in an employer-sponsored retirement plan, or, for someone who is participating, but whose adjusted gross income falls within eligibility guidelines.
A Roth IRA may be a better choice for individuals eligible to contribute. Contributions to a Roth IRA are not tax deductible; however, qualified distributions are received free from federal income tax.
A refund could also be used to contribute to a child's college savings. There are simple and affordable options available today, including tax-advantaged savings vehicles, to help parents reach their college savings goals.
One thing to remember after deciding the fate of this year's refund -- a tax refund check is not a windfall, but the return of an interest-free loan provided to the government. Regardless of the pleasure the receipt of a large check each tax year brings, adjusting the amount withheld by the government to reduce the amount of future refunds may be an appropriate course. There may be no refund in April, but there may be more money in each paycheck to contribute to a savings account or IRA or pay down debt throughout the year.
Taxpayers should take some time to consider options before making the down payment on that big purchase. The earlier one starts saving for his future, the more he may have during his retirement.
For more information about these options and others, contact a financial services professional that you know and trust.
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