By MARKET MATTERS BY BRIAN HEPP
For the millions of taxpayers who have recently completed their income tax filing, another annual ritual is beginning — the anticipation of waiting for a tax refund. If you’re one of those who will be receiving a refund this year, you may already be making plans for how you’ll spend that money. But before you get caught up in the excitement of spending that check right away, you may want to consider some other options that could provide you with significant benefits down the road.
The tradeoff between instant gratification and long-term gain is a difficult balance to manage. But now, with a tax refund on the way, you’re in a perfect position to make considerable progress in your personal savings.
Following are a few ideas to help you spend your refund wisely. ■ Start a savings plan. First of all, if you don’t already have a savings plan in place, the money from your tax refund could be the perfect starting point. Opening a savings account with that money is a good first step, but you’ll also want to put a plan in place to keep that account growing. Many financial institutions allow you to set up automatic savings plans, where funds are deposited into your account on a regular basis. You can even have those deposits taken directly from your paycheck, so you won’t even miss the money. Your tax refund can provide a solid foundation on which you can build this savings plan. ■ Add to your investment portfolio. If you’re already on the right track when it comes to savings, you can use your refund money to give your other investments a boost. Consider using your refund check to purchase additional shares of stock, or bonds, or any other vehicle you are currently invested in. Regardless of the type of investment you choose, your tax refund could add significantly to any regular investments you’re already making. ■ Increase your 401(k) contribution. One of the most effective ways to save for retirement is through an employer-sponsored plan such as a 401(k). Hopefully, you are already taking advantage by participating in such a plan, which allows you to make regular contributions with pre-tax money straight from your paycheck. These programs have limits on how much you can save, but if you’re not already maximizing it, you may want to consider increasing your contribution rate. For example, if you’re currently putting away 3 percent, you could increase your contribution rate by a percentage point or two, and use your tax refund to cover other expenses you would normally pay for with that portion of your income. ■ Open an IRA. If you have already taken full advantage of an employer-sponsored program, or if you work for a company that does not offer one, your tax refund check could be the ideal source of funds to open an Individual Retirement Account. As with the savings strategy mentioned earlier, you’ll want to establish a regular pattern for adding to this account. But your tax refund will get you started off on the right foot.
While it may be difficult to resist the temptation to spend your tax refund money now, you can see that there are other ways to make use of those funds. And even though there are many things you may want right now, the money you put away now could come in very handy down the road to help cover the cost of things you need.
Brian Hepp is a financial consultant with A.G. Edwards & Sons, Inc. He (310) 453-0077 or
Originally published in the Santa Monica Daily Press print edition on May 4, 2006. Read the original PDF.