Five Smart Ways to Use Your Refund

Tax Prep & Filing

Five Smart Ways to Use Your Refund

Beef up savings for yourself or your kids.

Who couldn't use a little extra cash right now? In the past, you might have spent your tax refund on a vacation or a shopping spree. Today, you may want to use it to pay off debt or prop up your savings.

1. Bolster your emergency fund. We've generally recommended that you keep at least three months' worth of living expenses in a safe and liquid savings or money-market account. But in today's economy, with jobs in jeopardy and credit tight, you should aim to stockpile at least six months' worth of expenses so you don't have to raid your retirement account or tap your shrinking home equity in an emergency.

2. Pay down high-interest debt. Retiring a credit-card balance with an 18% interest rate is like getting an 18% return on your money -- one of the best investments you can find today. (See If You're Buried in Debt)

3. Create future tax-free income. You can have your tax refund deposited directly into a Roth IRA. You are eligible to contribute up to $5,000 in 2009 ($6,000 if you are 50 or older) if you are single and your income doesn't exceed $120,000, or if you are married and your joint income doesn't top $176,000.


But even if you earn too much money to invest directly in a Roth IRA now, you can still make nondeductible contributions to a traditional IRA and then convert it to a Roth in 2010 when the $100,000 income limit on conversions disappears. You'll owe taxes only on the earnings, and all of the money will grow tax-free in the future.

4. Set up a 529 college-savings plan. You may qualify for a state income-tax deduction for your contributions, and the money can be used tax-free for college costs. (See Salvage Your College Savings.)

5. Open a Roth IRA for your kids. If your children have jobs, they can contribute to a Roth IRA up to the amount of their annual earnings (or $5,000, whichever is lower) and you can give them the money to do it. They can tap the contributions, but not earnings, anytime tax-free and penalty-free. (See Why Your Kids Need a Roth.)