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Tax refund should
be money in the
bank, not wasted

IF you haven't yet filed your taxes, you may think it's too early to ponder your refund. After all, you don't even know if you'll get one. But the odds are in your favor; historically, about three-fourths of all taxpayers receive refund checks. So, you may want to start planning for this "bonus" today. In fact, if you get a refund, and you haven't thought about what to do with it, you may be more likely to spend it -- and then it's gone. As an alternative, why not use your refund to help yourself make progress toward your key financial goals?

You might think that your refund wouldn't really be big enough to make much of a difference in your life. But that's not necessarily true. In 2004, the average tax refund was about $2,300. What could you do with this amount? Let's take a look:

» Contribute to your IRA. In 2005, you can put in up to $4,000 (or $4,500 if you're 50 or older) to a traditional or Roth IRA (income limits apply), so your $2,300 would put you more than halfway to the limit. It's almost always a good idea to fully fund your IRA, which offers substantial tax advantages. Specifically, a traditional IRA's earnings grow tax-deferred, while a Roth IRA's earnings grow completely tax-free, provided you meet certain conditions.

» Pay down your debts. Over the past few years, we've seen low interest rates in a number of areas -- mortgages, certificates of deposit, short-term bonds, etc. But there's at least one conspicuous exception to the low-rate trend: credit cards. You could easily have one or more credit cards that charge 11 percent interest -- or more. If you could get rid of that debt, you would, in effect, be earning an 11 percent (or greater) return. Consequently, you'd likely be making a pretty good "investment" by applying your $2,300 toward your credit-card debt.

» Save for college. College costs have risen sharply over the past several years. To send your children to college, you'll want to save early and save often. Fortunately, you can find several attractive college-savings vehicles, including the Coverdell Education Savings Account and the Section 529 savings plan. You can put up to $2,000 per year to a Coverdell Account so your $2,300 is enough to completely fund your plan for 2005. Or you might also want to consider putting your tax refund into a Section 529 savings plan. (Section 529 plan contribution limits are quite high.)

» Build an "emergency fund." If you don't already have an emergency fund containing three to six months' worth of living expenses, you should consider creating one -- and your $2,300 will make a nice start. Once you've set up an emergency fund, you may be able to avoid dipping into your long-term investments to pay for short-term needs, such as a major car repair or an expensive new appliance.

This year, when you get your tax refund, put it to work. By making the right moves, you can reap benefits from your refund long after tax season is over.