Financial advisers generally agree on three smart ways to use income tax refunds:
Number 1 is to save it. A refund will make a useful addition to your emergency cash reserve.
Second, pay off your credit cards. Any savings you achieve by reducing typical 18% interest costs probably will be larger than what you could make saving or investing the money.
Third, add the money to college or retirement funds. Opening or adding to a Roth IRA could be your most attractive choice. Although contributions to a Roth IRA are not tax-deductible, qualified withdrawals are tax-exempt if made more than five years after the Roth IRA was established and a taxpayer has reached age 59 1/2.
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