What To Do with Your Tax Refund

If you’re expecting a tax refund, you obviously want to get it as quickly as possible. That way, you can put it to work for you sooner rather than later. The fastest and safest way to get your tax refund is to submit your return online, using e-file.

There are three ways to file your tax return electronically:

  1. Use your own tax software. Most tax programs include the option to submit your return by e-file.
  2. Use a tax preparer. You can find an authorized e-file tax professional by clicking through a ink on the IRS home page at irs.gov and entering your zip code.
  3. Use “Free File” at the IRS website. You’ll find it at irs.gov/freefile.

If you e-file and request a direct deposit, you’ll probably receive your funds in less than ten days. But if you submit a paper return and request a direct deposit or a paper check it could take several weeks longer. Plus you run the risk that your tax form(s) or refund check could get lost or stolen. If you don’t receive your refund, it’s important that you make an inquiry about it using the IRS Refund Status Tool.

What To Do With Your Tax Refund

Taf Refund

What Should You Do With Your Tax Refund?

Once you receive your refund, there are a gazillion things you can do with it. Taking a vacation or going on a shopping spree immediately come to mind, but I bet you won’t be surprised if I tell you that the best thing you can do with the money is to save it. It might not be as much fun as many other options, but it will certainly go a long way toward improving your personal finances. Here are my recommendations for what to do with your tax refund in the order of priority:

  1. Add it to your emergency fund. One of the most important defenses you have against unexpected expenses or the loss of income is a cushy emergency fund equal to at least six months worth of your living expenses. If you don’t have a reserve fund or if it’s not as big as it should be, make sure that’s the number one priority for your tax refund!
  2. Purchase health insurance. If you don’t have health insurance, consider using your tax refund to pay premiums for an affordable policy, such as a high-deductible plan. That’s the kind of policy that also gives you the ability to open up a tax-advantaged Health Savings Account.
  3. Pay down high-interest debt. If you have at least a few months worth of living expenses saved in an emergency fund, but also have expensive consumer debt like credit cards, retail store cards, or payday loans, use your tax refund to pay them down.
  4. Fund an IRA. If you don’t have an Individual Retirement Arrangement (IRA), use your tax refund to open an IRA. You can contribute up to $5,000 to an IRA in 2011, or $6,000 if you’re age 50 or older. Be aware that there are tax penalties for withdrawing money from a retirement account before the age of 59½. So be sure to put money in an IRA only after you’ve established an emergency fund and are sure you won’t need the money.
  5. Fund a 529 Education Savings Account. If you’re saving money for your own education or that of a child’s, consider putting your tax refund in a 529 plan, where funds can grow completely tax-free if you spend them on qualified education expenses.

You can even opt to split up your refund and have it automatically deposited into multiple financial accounts, like an IRA and a savings account, using IRS Form 8888. If you just want to have the money sent to one account, simply use the direct deposit line that’s on the regular tax form.

An important tip is that if you consistently get big tax refunds each year, you probably need to adjust your withholding so less tax will be deducted from your paychecks. Use the IRS Withholding Calculator to help you complete a new Form W-4 and submit it to your employer. Remember that it’s not a good idea to use a tax return as a forced savings plan—it’s better to pay yourself first with higher paychecks throughout the year. That way you can save the amount you’d otherwise be paying to the government and make interest on it, instead of loaning it to Uncle Sam for free.








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Date published: March 8, 2011.

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Laura Adams is the author of a new award-winning book, Money Girl's Smart Moves to Grow Rich. Order your copy at MoneyGirlBook.com. Laura's weekly Money Girl podcast has been downloaded over 10 million times. You can subscribe for free on iTunes and get her updates at SmartMovesToGrowRich.com, Twitter, and Facebook.

Comments

  1. I did a direct deposit and efile this year. I got my refund in less than 2 weeks, i very surprised to get it so quickly. I filed a month early and got everything out of the way. I’m very happy to be done with it for this year :)

  2. Thanks Ash i hope i do get it the 21st

  3. samuel kleinman says:

    Are you kidding? Who got a tax refund after having to pay 13 months taxes on a contrived pay date moved from 3 Jan 2012 to 30 Dec 2011. The pay system is faulty. No pay day in four months in 2012, four months with two pay days and four months with one pay day. When are we going to get the whole story.

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