Smart Ways to Manage Your Tax Refund

North Americans are getting smarter with their tax refunds. According to the National Retail Federation’s Tax Returns Consumer Survey, 43.8 percent of refund recipients — the most in the survey’s history —  plan to save a portion of the cash. Simply saving, however, may not be the best tactic when trying to get the most from the potentially sweet lump sum. [Also see The Worst Ways to Spend Your Tax Refund.]

Whether you plan to be part of this promising statistic or not, consider these tips on how to spend your refund wisely and make the money work for you in the longterm.

1. Prioritize
Take a good look at your debts, savings, investments and upcoming expenses before that tax refund hits your bank account. Doing so will help you prioritize the best outlet for the extra cash, or know better how much to divvy up between accounts.

2. Review Your Withholdings
According to CNN Money, the average 2011 tax return was nearly $3,000. Getting that kind of cash from the IRS is great until you recognize it for what it is – money withheld from your income that always belonged to you. If your among the majority who received a sizable sum last year, adjust your withholdings to ensure more money in your pocket this year.

3. Conquer High InterestTax Refund
A large refund offers the perfect opportunity to pay down credit cards, student loans and medical bills. However, it’s key to conquer high-interest credit cards first to save more money over time. Identify which of your debts carries the highest interest rate and contribute accordingly.

4. Build a Contingency Fund
Personal finance experts recommend six to nine months of living expenses be saved in an emergency fund for those unpredictable events like job loss, home repair or medical expenses. It’s not as fun as buying a new TV but you will feel more secure knowing these funds cushion your finances.

5. Invest in Your Health
Is one of your goals to get in better shape this year? Then put your money where your mouth is and use your tax refund to join a health club, partner with a personal trainer or build an at-home gym. You can find equipment on the cheap at discount retailers or order online with free shipping from Dick’s Sporting Goods or other fitness stores. By boosting your cardiovascular system and improving your overall health, expenditures on future medical expenses will be greatly reduced.

6. Make an Extra Mortgage Payment
An extra payment (or two) toward the principal of your home mortgage will save you thousands of dollars in interest on your fixed loan. Be sure to calculate the correct amount of additional principal and enter the information in the appropriate section of your bill.

7. Consider Your Kids
If you haven’t already, consider using a portion of your tax refund to establish 529 plan/RESP College Savings Accounts for your children. Some states offer partial or full tax deductions for contributors and you can feel secure knowing your kids will not be taxed when they spend the funds on tuition, fees, books, room and board.

8. Prepare for Retirement
Take advice from the smartest of the smart and open a Roth IRA/TFSA with your tax refund. In addition to securing tax-free income at retirement, you avoid paying taxes on earnings and even have the option to withdraw contributions penalty- and tax-free if necessary. Unlike traditional IRAs, your children can receive tax-free distributions from the account once you’re gone.

Andrea Woroch is a consumer and money-saving expert for Kinoli Inc. As a nationally recognized media source, Andrea has been featured on Good Morning America, NBC Today Show, MSNBC, New York Times Bucks Blog, Kiplinger Personal Finance, CNNMoney and many more. To view recent interviews or for more savings tips visit AndreaWoroch.com.

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Comments

  1. says

    Good point about the refund money being yours in the first place. I think some people would argue with your tip about paying off the highest interest debt first. To me it makes sense to do it that way to pay the least amount of interest. For those struggling with debt though, they may be better off targeting the debts with the smallest amount owing first. This allows them to feel a sense of accomplishment. Plus they can use the normal monthly payment from that debt to put towards the next debt.

  2. says

    I was suppose to get about $1200 for my tax return this year, but since I still have student loans, the government took it with out me even seeing a dime of it. At first, I thought this was illegal, but I didn’t really mind since I was planning on putting a majority of it towards my loans anyway. If I hadn’t been forced to put it forth my loans, I personally think my best option would just save it for the time being to help me have a down payment for my first mortgage!

  3. says

    All great points and ideas on what to do with a large return. As for me, I don’t allow the government to hold on to my money all year long and make interest (I don’t need them to teach me how to save) so I claim as much as I can in order to get my money up front and have it be where I owe nothing or get a small refund. It works out way better for me that way :)

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  1. [...] Highway gave us some smart tips to manage your tax refund.  That reminds me, I need to write a post about what we did for this tax year.  I hope to have [...]

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