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FINANCIAL
FOCUS
Put Your Tax Refund to Work
Guest Column
It’s Tax
Refund Season again. This year, if you’re going to get a
check from your Uncle Sam, why not put it to work to help
you meet your financial goals?
Last year, the average tax refund was more than $2,700,
according to the IRS. The size of your refund, or whether
you will get one at all, depends on your individual
circumstances. But if you are going to get a refund, plan
ahead for what you’ll do with it. Here are a few
possibilities:
• Pay down some debts. In these difficult economic
times, you may be carrying a higher debt load than usual.
If so, you may want to use some of your refund to pay down
some of these debts. The lower your debt payments, the
better your cash flow and the more money you’ll have to
invest for the future.
• Build an emergency fund. If you don’t already have
an emergency fund containing six to 12 months’ worth of
living expenses, you could use your tax refund to start one.
Without such a fund, you may find yourself constantly
dipping into your long-term investments to pay for
unexpected costs, such as a new furnace or an expensive car
repair. Keep your emergency fund in a liquid account — one
that you don’t draw on for your day-to-day expenses.
• Help fund your IRA. In 2010, you can put in up to
$5,000 to your IRA. Consequently, if you received a $2,700
refund, you’d have more than half of what you need to fully
fund your IRA for the year. (If you’re 50 or older, however,
you can contribute up to $6,000 per year.)
You might not think that your $2,700 would make much of a
difference in the long run. But by investing your refund and
giving it many years of growth potential, you could end up
with a sizable amount. Consider the following:
• If you
put $2,700 in your IRA, and you earned, on average, seven
percent a year for 30 years, you’d end up with about
$20,000, even if you never invested another dime.
• If you
put $2,700 every year in that same IRA, again earning an
average seven percent annual return, you’d end up with more
than $270,000 after thirty years.
(These
examples are hypothetical illustrations and do not represent
any currently available investments.)
You’d eventually have to pay taxes on your earnings,
typically when you make withdrawals at retirement. And if
you qualified for a Roth IRA, you’d never have to pay taxes
on your earnings, as long as you had your account for at
least five years and didn’t start taking withdrawals until
you were at least 59-1/2.
• Contribute to a Section 529 plan. If you have
children or grandchildren, you may want to establish Section
529 plans to help them pay for college. You can contribute
virtually any amount, and the earnings grow tax-free,
provided the money is used for higher education expenses.
(Withdrawals used for
expenses other than qualified education expenses may be
subject to federal, state and penalty taxes. Contributions
are tax-deductible in certain states for residents who
participate in their own state’s plan. Please note that a
529 college savings plan could impact a beneficiary’s
ability to qualify for financial aid.)
You may be tempted to spend your tax refund on things you
want today — but, with a little planning, you can use it
for things you need tomorrow.
This article was
written by Edward Jones and provided by your local Edward
Jones Financial Advisor, Lawrence Hodges III, 2273 S.
Byrne Rd., 419-474-4715.
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