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Don't Waste This Tax Opportunity: 3 Smart Ways to Use Your Refund

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TaxesIt's hard to save, especially when times are tough. But when you get a tax refund check, you've essentially set up an IRS-sponsored savings plan. By overpaying your taxes a little bit every month, you build up a slush fund that you collect on every April.

So since you've already saved it, why not put it to use? Here are three ideas to consider.

1. Pay down your debt. Being in debt is a never-ending cycle of stress. Charges from high interest rates can make you feel as if you'll never pay off your creditors. But a big lump-sum payment toward that high-interest debt is the best investment you can ever make. By reducing or eliminating the amount of your monthly payments, you'll also free up more money all year round.

2. Start an emergency fund. Sure, it's nice to spend money on something you want. But if you're struggling to get by, saving it for times when you really need it could be the first move toward digging yourself out of your financial hole.

Think about it: When you need cash quick, you have limited options. Credit cards charge hefty interest rates. Payday loans rates are even higher, and their fees add up in a hurry. Actually having money set aside can save you a fortune -- freeing up even more money to help you make ends meet.

3. Open an IRA. Starting a retirement account may not be the most fun way to use a refund, but it can be one of the smartest. Not only do you help yourself with your financial future, but you may be able to turn your contribution into a bigger refund next year.

Traditional IRAs give you a tax deduction that you can use to offset income and pay less tax. In fact, if you act quickly, you can actually open an IRA to get another refund for this year -- although you'll have to file an amended return to claim it.

A tax refund is found money, but what you do with it can make a huge difference to your financial well-being.

Motley Fool contributor Dan Caplinger isn't getting a tax refund this year, alas. You can follow him on Twitter here.

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Betty

Like someone else said, the refunds are getting smaller and smaller each year. I realize that the money I get back is money that I have over paid but, like to look forward to refunds as it is usually satsh money. That is, until this year! It was gone almost before I got it!! Thank Goodness, I got it though. It beats borrowing from Peter to pay Paul????

April 15 2012 at 1:30 PM Report abuse rate up rate down Reply
Sally

First thing: the end of the article says "a refund is found money." No, no it isn't. It is nothing more than an overpayment of taxes during the year--like a forced savings account from which you get no interest. If you figure out what you are going to need to pay in taxes and have the correct withholding taken you end up even, or close. So, no refund, but more money in your pocket every week--or money put into paying down debt, an emergency fund or starting an IRA.
Secondly--and this is not to negate the value of the mentioned uses for the refund--consumer spending is the big driver of this economy and many people have historically used their refund to make purchases they would not otherwise make. For better or worse, buying the big TV or a new sofa or making a down payment on a car is also a valid and useful way to use money. More money in the economy means a faster recovery for all of us. Contrary to what some politicians would have you believe, wealthy corporations and individuals are not the job creators--consumers are. No business hires people unless there is demand for goods and services--and that comes from people buying stuff, taking trips, fixing up their homes, etc.
So yeah, pay your debt and start some savings--but don't feel too guilty treating yourself to something new--it benefits the economy.

April 15 2012 at 12:43 PM Report abuse rate up rate down Reply
mclkarim

Yes, pay off debt first and put whatever is left over away for a rainy day because there are way too many of them.

April 15 2012 at 11:23 AM Report abuse rate up rate down Reply
cne43

Anyone who needs to read this article doesn't deserve a refund. Any dodo who can't figure out how to best use their refund probably never made it past the 8th grade.

April 15 2012 at 9:06 AM Report abuse -1 rate up rate down Reply
estimatorone

Save it, save it, save it - the next financial crash is just around the corner.
And, unless you really know what you are doing, keep it out of the stock
market.

April 14 2012 at 11:53 PM Report abuse rate up rate down Reply
LAURA

REFUND? What refund? The government wants every freeking penny I make and then some just so government employees can go on trips to Hawaii and Vegas and Obama can golf and take his family on million dollar vacations. Again, WHAT REFUND????

April 12 2012 at 12:40 PM Report abuse +1 rate up rate down Reply
Cheryl

My husband and I filed our income taxes earlier this year. My social security number had been used and strangers claimed our refund. We went to an IRS office and they said they would look into it but we probably wouldn't hear anything for 2-3 months.

April 12 2012 at 12:06 AM Report abuse +1 rate up rate down Reply
nghtsailor

I filed my income tax a month ago via email. It was rejected due to someone else had already filed theirs with my social security number. How?. My W2s, 1099s, etc. all proper with my (and wife's) address. IRS said send snail mail and they would send it to their investigative dept. Might take 2 months to a year. YOU HAVE TO BE KIDDING ME Several thousand 'cause I paid too much after retiring.
HELP!

April 11 2012 at 8:51 PM Report abuse rate up rate down Reply
hman570

Refunds are getting smaller and smaller each year. How do you expect people to do any of the above. Gas, oil, food, clothing and taxes are going thur the roof. I guess this jerk is a High roller to be able to do all they things he is telling others to do with their money.

April 06 2012 at 9:16 PM Report abuse +1 rate up rate down Reply
MOR239

WHAT REFUND?????????????

April 06 2012 at 1:36 PM Report abuse +1 rate up rate down Reply