Smart ways to spend your tax refund

Did you get a big tax refund this year?  How did you spend it - vacation, clothes, pay down debt?

The average income tax refund is over $2,000.  That’s a lot of money, so you want to make sure you put it to good use.  Here are five smart ways to spend your tax refund this year:

1. Fund your IRA or Roth IRA for 2007.  The maximum contribution is $4,000 ($5,000 if you’re over 50).
2. Put some money in your childrens’ college fund - you have several options including 529 plans, Coverdell savings accounts, UTMAs and more.
3. Increase your emergency fund - generally, you should have 3 to 6 months living expenses set aside for emergencies.
4. Pay down high interest credit cards.
5. Pay for home improvements or your annual vacation.

Getting a large refund can feel like a windfall, and can be useful to pay down debts or meet other unexpected expenses.

However, getting a big refund may not be the smartest financial move.  After all, a big refund really means you’ve given Uncle Sam an interest free loan.  You could have been using that money throughout the year to pay down debts, save for retirement, or to meet other financial goals.

I don’t know about you, but I’d much rather get bigger paychecks that get a big refund every year.

To adjust your withholding, complete a Form W-4 (ask your employer for a copy or click here for a blank form) and submit it to your employer.

To calculate how much you should be withholding, check out the IRS withholding calculator.

To see how your paycheck will be affected by any withholding changes, check out PaycheckCity.com’s paycheck calcuator (very cool tool).

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Tags: tax refund, income tax refund