Put a Refund to Work

Making Your Money Last

Put a Refund to Work

Kimberly Lankford suggests ways to make good use of a tax refund.

I just filed my income-tax return and will be getting a pretty big refund. Rather than spend the money, I'd like to use it to improve my financial situation. What do you suggest? -- Lester Herrera, Alameda, Cal.

First of all, if you have high-interest credit-card debt, use the refund to help pay it off. Many credit-card companies boosted interest rates before the new credit-card law took effect in February, so carrying a balance now may cost you more than it did in the past. Paying off a balance with an 18% rate is like earning 18% on your investments.

Next, use the money to rebuild your emergency fund. Many people had to raid their fund over the past year and didn't have enough extra cash to restock it. Try to keep at least six months' worth of essential expenses in this account, or more if you think your job -- or your spouse's -- is in jeopardy.

You could also use the money to boost your retirement savings. You have until next April to contribute up to $5,000 to an IRA for 2010 (or $6,000 if you're 50 or older), but the sooner the money is in the account, the sooner earnings are sheltered from the IRS. If you're single and your modified adjusted gross income is $120,000 or less ($177,000 or less if married filing jointly), you can contribute to a Roth IRA, which lets you withdraw the money tax-free in retirement. If you earn too much for a Roth, you can contribute to a nondeductible traditional IRA, then immediately convert it to a Roth.


If college for your kids or grandkids is on the horizon, you could fund a 529 college-savings account. The money can be used tax-free for college bills, and you could get a state income-tax deduction for your contribution. Or you could use the money to give your child a head start on saving for retirement by funding a Roth IRA. Your kid can contribute the amount of his or her earned income for the year, up to the $5,000 annual maximum. And you can provide the cash to do it.

Rather than giving Uncle Sam an interest-free loan over the next year, consider putting more cash in your pocket with each paycheck. To learn how to adjust your tax withholding, see Kiplinger's Recipes for Quick & Easy Financial Fixes.

Roth conversions and college aid

I'd like to convert a traditional IRA to a Roth, but my son will be going to college soon. Would converting the IRA affect our chances of getting financial aid? -- T.C., Boston

It might. Even though IRA balances aren't counted as assets in the federal financial-aid formula, converting a traditional IRA to a Roth could affect your award because the money you convert will increase your taxable income for the year.


If you plan to apply for financial aid in the next few years, you'll want to time your Roth conversion carefully, warns IRA expert Ed Slott. If your child is a high school senior, this year's financial-aid application is unaffected because it reflects your 2009 income. But when you file for financial aid next year, a 2010 conversion could have an impact. Even if your child is a sophomore or a junior, a conversion in 2010 could affect your college-aid award if you take advantage of the opportunity to spread the tax bill for the conversion over 2011 and 2012.

If you decide to do the conversion anyway, Haley Chitty, spokesman for the National Association of Student Financial Aid Administrators, recommends contacting colleges your student has applied to and explaining why your income looks so high. Do it as soon as you receive your federal student-aid report rather than waiting until the colleges notify you of their aid awards. Financial-aid administrators are allowed to use their professional judgment to decide whether to count the conversion in your income, Chitty says, so some schools will handle it differently than others. Several aid administrators told us that they don't plan to count an IRA conversion as income.

If you've already converted a traditional IRA to a Roth and you're worried that the extra 2010 income could cost your family college aid, remember that you can undo the conversion -- that is, switch the account back to a traditional IRA -- anytime before you file your 2010 tax return next spring. That will eliminate the conversion income.

Catch-22 on credit-card payments

I know that the new credit-card law changed the rules about when the bills are due. What happens if my due date falls on a weekend? -- F.F., McLean, Va.


Your payment will now be due on the same day every month, which makes it easy to keep track of the deadline. The law also specifies that if the due date falls on a day that the card company does not process payments, you have until 5 p.m. the following business day for the issuer to post your payment without it being considered late. Some card companies are accepting payments on weekends. For example, Capital One processes payments Monday through Saturday. So if the due date falls on a Saturday, the payment must be received by 5 p.m. that day. Sunday payments are processed on Mondays. Bank of America and Chase process payments on Saturdays, Sundays and holidays.

But here's the problem: Some banks allow you to schedule online payments only for weekdays. So even if your payment isn't due until Saturday or Sunday, you need to schedule it for Friday to avoid a late fee. To be safe, call the card company and your online bill payer to ask about their procedures. For example, Bank of America lets you make a payment online or by phone on the due date for no extra charge. Better yet, schedule your online payments so they arrive before the due date.