Use Your Tax Refund Wisely
Your Form 1040 is filed and you're now anxiously waiting for your tax refund. What's next?
- First on your list of priorities might be to pay down any high-interest credit card debts. By paying only the minimum each month, you may be paying just the interest (or less) on the debt and little or nothing toward the principal. Paying down the debt can help free up additional money for other important financial needs.
- If credit card debt is not a problem, contribute to an existing IRA or establish a new one. Contact your registered State Farm® agent to learn about the maximum contribution you can make this year. If you're 50 years or older by Dec. 31, you may be able to add an additional $1,000 to the account. Making a tax-deductible contribution to a Traditional IRA is an option if you aren't participating in an employer-sponsored retirement plan or, if you are participating, your adjusted gross income falls within eligibility guidelines.
- A Roth IRA may be a more appropriate choice, depending on your eligibility. Contributions to a Roth IRA are not tax deductible. However, qualified distributions are received free from federal income tax.
- Your refund could also be used to contribute a Coverdell Education Savings Account (ESA) or 529 Plan for your child or grandchild. Contributions are not tax-deductible, but withdrawals to pay qualified educational expenses are free from federal income tax.
What's Important to Know
One thing to remember after you've decided what you want to do with this year's refund: the check you received is not a windfall, but the return of an interest-free loan you provided the government.Adjusting the amount withheld to reduce the amount of future refunds may be an appropriate decision. You may not get a refund in April, but you may have more from each paycheck to contribute to a Coverdell ESA, 529 plan, IRA or to pay down debt throughout the year.
Take some time to consider your options before making the down payment on that new car. The earlier you start saving for your future, the more you may have during your retirement.
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