Five Smart Uses for Your Tax Refund

As the economy continues to sour, many are giving extra thought to how they will spend their tax refunds. The question of where to allocate this “additional” cash is all the more weighty for the growing population of people who are either self-employed, unemployed, or in transition. So what is the best use for your tax refund? Consider these top five options:

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1. Set up an emergency fund. Many financial advisors suggest that people set aside a year’s worth of living expenses in a safe, liquid account such as a savings account, CD, or money market account. This is especially important if your current income is lower than usual or inconsistent.

2. Pay off any high interest loans. You can use your tax refund to pay off or pay down any loans with a high APR, such as credit cards. Not only can this reduce your debt load, but you can reap big savings on interest payments.

3. Put money in your IRA. The IRS allows people to direct deposit their refunds into an IRA, a Roth IRA, a SEP IRA (for self-employed individuals), or a health savings account. You can invest in a Roth IRA if your adjusted gross income in 2009 is $120,000 or less if single, or $176,000 or less if married filing jointly. If you earn too much money to invest in a Roth, you can contribute to a traditional IRA, then convert it to a Roth in 2010, when the $100,000 income limit for conversions will be discontinued.

4. Increase your credentials. You can use your tax refund to increase your earning potential by investing in a course, seminar, or any program that will expand your expertise and skill level.

5. Improve the condition of your equipment. A tax refund could be used to upgrade or service your equipment, appliances, and automobiles. By making your equipment run more efficiently and effectively, you’ll end up saving a lot of time and money.


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