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Pay Off Debt with Your Tax Refund

Written by Ilyce Glink on April 25, 2012 in Credit  |   No comments

Have you received your tax refund yet? If you filed just under this year’s April 17 deadline, you’ll probably have to wait a few weeks. But if you took care of your taxes early, then your tax refund is probably already burning a hole in…

Have you received your tax refund yet? If you filed just under this year’s April 17 deadline, you’ll probably have to wait a few weeks. But if you took care of your taxes early, then your tax refund is probably already burning a hole in your bank account.

Getting a big tax refund isn’t necessarily something to brag about—it means you gave Uncle Sam a tax-free loan for the last year. But until you adjust your withholding and are receiving more of that money in your paycheck every month, you can make some smart decisions with your tax refund.

How are you planning to spend your refund? Vacation? New TV? Socking it away in your savings account? This year, instead of blowing it on luxuries or new gadgets, pay off debt with your tax refund and get a better return on your investment.

The best debt to pay down with your tax refund is non-deductible debt with high interest rates—in other words, credit card debt. If you have several credit cards, pay off the one with the highest interest rate first, and then work your way down. Next, start paying off your auto loans, school loans, and other loans.

If you don’t have debt to pay off, consider a better savings avenue than a traditional savings account. These days you’re lucky to earn any interest on a savings account, but a college fund for your children (or yourself) is a great investment in the future. Check out 529 savings plan options in your state.

You can also maximize the benefits of your tax refund by funding your Roth IRA. You can put up to $5,000 a year into a Roth IRA and let it grow tax-free until retirement. You can’t beat that kind of return.

Another option to consider is starting or adding to a house fund. With home prices still dropping, a few thousand dollars will go a long way for your down payment. You could also use the money for closing costs or moving expenses. On the other hand, if you’re staying put for a while, you can use your tax return for some home renovation or regular maintenance.

Leave your comments below with how you’ll be spending your tax refund.

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