Six ways to beef up savings with tax refund

ATLANTA (3/26/07)--It's time to make plans for that overpayment to Uncle Sam. Earmark your tax refund now--for special savings goals--or it will disappear before you know it (CNNMoney.com March 22).

Expect a bigger windfall. Data from the Internal Revenue Service last week indicate that the average tax refund is $2,548, an increase of about $125 from last year (Associated Press March 20).

Here are six ways to beef up savings:

• Fund your IRA. You can make up to a $4,000 contribution ($5,000 if you're 50 or older) to a Roth or a traditional individual retirement account (IRA) for tax year 2006 through April 17 this year.

• Sock away funds in a 529. If you save for your child's college education in a 529 plan, you may get a tax deduction for your efforts. Visit SavingForCollege.com to see if your state offers an income tax deduction for contributions you make to a 529 plan.

• Open a CD. One-year certificate of deposit rates have been relatively favorable this year. If you're going to need money for a big-ticket purchase for a car or a down payment on a home, consider investing your money in a CD for one year.

• Give your emergency fund a boost. Expect the unexpected. You need three to six months of expenses stashed away if your car breaks down, the furnace conks out, your refrigerator dies--or you lose your job. Direct your tax refund to a high-yield savings account such as a money market account.

• Pare debt. Use your refund to pay off that high-interest-rate credit card debt, particularly if the rate is higher than the rate you're getting on your savings accounts.

• Start a Holiday Club account. Credit Union National Association Center for Personal Finance senior editor Michelle Dosher says Holiday Club accounts let you save for holiday spending in advance rather than rely on credit cards at the last minute. "You even can arrange to have your money deducted from your paycheck, making saving as painless as possible," adds Dosher. "Ask at your credit union for details about starting one."

If you haven't filed your tax return yet, consider splitting your refund in up to three accounts for future needs. Refund-splitting is new this year. To do this, you'll need IRS form 8888, available at irs.gov.

For more information about taxes, read "Credits and Deductions Save You Tax Dollars" in Home & Family Finance Resource Center.


Printed Thursday, November 20, 2008

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