5 Smart Ways To Use Your Tax Refund -

Some of you are about to come into a bit of money in the next few months and while nobody likes filing tax returns, most people are rewarded handsomely for their efforts: About 75% of taxpayers get a refund, according to the Internal Revenue Service. In 2008, the average refund rang in at more than $2,000 which is a nice chunk of change.

A cash windfall like this, of course, has Americans across the country struggling with tough decisions, like whether they should buy the plasma TV or book that last minute trip to the Caribbean . As tempting as it may be, consumers would be far better off resisting the consumer electronics department's siren song or tidal pull of rum punch on the beach. Here are five better ways to put that money to use.

1. Don't Borrow Against It:
OK, before I get into some suggestions on what people should do with their refunds, let's start with one thing they should definitely avoid: the refund-anticipation loan. Despite numerous warnings by consumer-watchdog groups and reams of bad press, refund-anticipation loans (RALs) — which allow taxpayers to borrow against their expected refund — continue to be a popular waste of money. In fact, about one in 10 taxpayers took out a RAL in 2008, according to research from the National Consumer Law Center (NCLC) and the Consumer Federation of America.

The appeal of these loans is that they deliver cash in a day or two, via a tax preparer, who's repaid when the real refund arrives. The problem with these loans is that they don't come cheap. For example, a borrower pays about $30 to $165 (costs vary, in part, by the loan amount) for what typically turns out to be roughly a 10-day loan. The cost usually includes administrative fees as well as interest charges, which can be downright usurious. The annualized interest rates on these loans can be upward of 700%.

That's not the only problem. "If, for some reason, the refund is held up or denied by the IRS, you the borrowers are still on the hook for the loan. Folks should know that if something happens, they're liable. And if the loan isn't repaid quickly, late fees are likely to be added. We implore our readers not to shrink their refunds before they even arrive. For those with a real need for fast cash, a better option is simply to file electronically and have the refund deposited directly into a checking or savings account. Opting for this faster treatment won't cost a dime, and should deliver the refund in about 10 business days, rather than the four to six weeks it takes via snail mail.

It's also worth noting that in addition to the immediate gratification, some folks take out an RAL as a means of paying for their tax preparation. Tax preparation firms encourage this by allowing the taxpayer to deduct the cost of preparation from their RAL. (In other words, the loan includes the cost of the tax preparation, which is then covered when the refund arrives.)

2. Pay Off Debt:
These days, the average household with at least one credit card is carrying more than $9, 200 in credit-card debt, according to CardWeb.com. And consider this chilling statistic: Even if no additional charges are added to that debt, it would take a card holder making just the minimum payments 389 months and $10, 505 in interest payments alone to kiss that debt goodbye, according to a calculator I used on CardWeb.com. Needless to say, tackling high-interest credit-card debt is one of the smartest ways to use a tax refund. After all, doing so provides an immediate return on investment. (And most likely at rates that would be difficult to duplicate in today's stock market.)

3. Start an Emergency Fund:
We know it's not easy to save money , but the fact is everyone should have a bit of extra cushion in their budget in case of an unexpected blow, such a job loss, illness or injury. An emergency fund should consist of three to six months' worth of living expenses held in a cash account like a money-market fund.

4. Start A Retirement Fund:
Did you know that if you put away $1,000 a year for 25 years at a 12% interest rate, you can accumulate $1,000,000 by the time you retire? That way, when they decide to eliminate Social Security altogether (which I think will eventually happen), you’ll still be able to retire and live comfortably with no worries.

5. Contribute to an IRA:
Think about it: If a person invested a refund in a tax-deferred account earning 8% annually, she could double her money in less than 10 years. IRAs — particularly a Roth IRA — could be a great way to do it. Roth IRAs, doesn't have an upfront tax break (like there is with a tax-deductible IRA), but qualified withdrawals taken after age 59 1/2 are completely tax free. Another way to put is "give up the deduction, go for the Roth, and it's all yours for the rest of your life."You don't have to share it with anybody." And remember: There's still time to make a 2008 contribution (the deadline is April 15). Some folks worry that their money will be locked up until retirement. But it's worth noting because one can always withdraw original contributions at any time without penalty. So if an emergency does arise, the money is available. However, you do have to keep your earns in the account for a least 5 years and until 591/2 to withdrawal it tax free! so be careful.

What's best for you always depends on your personal situation, but for most people, one of the options discussed here will benefit you most in the long run. All in all people, we have to become debt free and financially independent for 2008 and beyond. A lot of us claimed in resolutions that we want to get out of debt and save some money. What better way to start your plan to get out of debt than with your income tax refund? That way you can still live off your regular income and still be able to save.

You can do these steps once a year for the rest of your life and still keep your standard of living the way that it is now. The best and most important part in all of this is that you’ll be in control of what you do with your money. If you need assistance with any of these steps and for tax preparation, please feel free to contact me at the link below.

Sharif J. Small, '05

S.J.S. Financial Firm