Burning A Hole In Your Pocket: What to Do With Your Refund

A Tax Fact from The Tax Institute at H&R Block

Though your refund "windfall" may tempt you buy that something special you've been putting off because of the cost, there are some other ways you can use your tax refund to actually improve your overall financial situation. The overall benefit of having your refund work for you can be far reaching.

Here are some suggestions:

1. Pay off or pay down credit card debt. Last year, the average amount of a tax refund was nearly $2,400. Applying most of that refund to a high credit card balance (several thousand dollars, for example) can save you thousands of dollars in interest that you would have paid over the life of the loan.



2. Pay down your mortgage. You'll be amazed how much interest you can save over the life of a mortgage if you prepay some of the principal.



3. Open an IRA. You can now contribute up to $4,000 annually and deduct the contributions. An additional amount of up to $1,000 may be contributed for individuals age 50 or older. Earned income requirements and age limitations apply. Also, low-to moderate-income taxpayers can qualify for the Saver's Credit, a tax credit of up to $1,000 for contributing to a retirement savings account.



4. Open a Roth IRA. Roth IRA contributions are not tax deductible, but qualified withdrawals from the account are not taxed. Qualified withdrawals may be made at any time tax-free and penalty-free. The Saver's Credit applies to Roth IRAs as well.



5. Invest it. Investing your refund in stocks, bonds, mutual funds and/or money market funds can provide higher returns than a savings account, though investing is riskier and generally involves broker's fees and other expenses. A financial advisor can help you choose the best way to invest to meet your personal financial needs. (You can call 1-800-HRBLOCK to locate the H&R Block Financial Advisors' office nearest you.)



6. Save for a child's college education in an account that grows tax-free earnings. The contribution limit for Education Savings Accounts (ESAs) is $2,000. And Qualified Tuition Program accounts (QTPs), also called Section 529 Plans, have no annual contribution limits. You might also receive a deduction on your state taxes for contributing to your state's QTP.



7. Save toward a down payment on a home or a new car. Traditional savings accounts, money market accounts and certificates of deposit (CDs) are ways you can save your refund.



8. If you make estimated tax payments, you can apply your 2007 refund to your 2008 taxes.

This Tax Fact is brought to you by The Tax Institute at H&R Block.

To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always...everyone's tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.