CNN reports that tax refunds are up this year, topping $2,500 on average. That may or may not seem like a lot of money, but whatever your perspective there ways to maximize the impact of every dollar.
For starters, remember that this is your money – you’ve been overpaying the IRS all year, and now they’re just giving it back to you. But most people think of a refund as forced savings.
CNN Money has these ideas putting your tax refund to good use:
Fund your IRA: You’re allowed to make up to a $4,000 contribution ($5,000 if you’re 50 or older) for tax year 2006 through April 17 this year.
Fund a 529: Socking money away for a child’s college education is one of the harder financial demands of parenthood. But at least in a 529 you may get a tax deduction for your efforts. To see if your state offers a tax deduction for a 529 plan, visit SavingForCollege.com.
Open a CD: Rates have been pretty favorable – averaging 5.4 percent of late, which is about double the rate of inflation. Check out the Loan Center for a comparison of specific banks’ CD rates.
Add to your emergency fund: There’s nothing less fun – or harder to save for – than a rainy-day fund worth three months of your expenses to protect you financially if ever you’re laid off or face a large unexpected expense like a broken down car or water heater.
Reduce your credit card debt: If you’re carrying high-rate debt reducing or eliminating your balance sooner rather later can save you a bundle long-term.
If you want to put your refund to use in more than one way, the IRS is now offering a split-refund option, which lets you designate up to three accounts at financial institutions into which you want the IRS to direct deposit portions of your refund. To activate this option you’ll need to fill out Form 8888 and send it in along with your tax return.
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