Great Ideas for Your Tax Windfall
The federal government will soon be returning 28 billion dollars to 130 million US households as part of the 2007 tax stimulus package.
Right. Well, let’s put aside for the moment the fact that it was our money to begin with, and we’ll also put aside that the federal goverment doesn’t have 28 billion dollars to spare unless it dips further into debt to the Chinese by floating more bonds.
That aside, Bush hopes this windfall will give the economy a “shot in the arm”–he obviously anticipates that that spend-happy consumers will fritter away the funds on consumer electronics, overpriced sneakers, fried snacks, or whatever useless junk Madison Avenue can shove down our throats.
Don’t be a sucker. A tax refund like this is a blessing that doesn’t come often. If you spend it on restaurants and ipods and Nikes, you’ll be just the sucker the Bush administration is hoping you’ll be. I say: take the money and run–straight to your bank, trustee, or brokerage and put that money away for the future. My family’s $1200 is going straight into an asset-protected and tax-free 529 education plan we set up for my daughter before she was even born.
Here are 8 great things you can do with your tax stimulus refund–but be warned–these are prudent, healthy financial moves that aren’t going to enrich the US retail industry, nor make you thinner, cooler, or more beautiful–only smarter and wiser.
1. Invest in a 529 Education plan. Quick definition: a 529 education plan is form of trust where you contribute money for the education of pretty much anyone (most folks set them up for children). Here’s the kicker: the funds grow tax-free as long as they are ultimately withdrawn for “educational purposes”. Another benefit: the funds belong to the trust, not to you anymore. Get sued? No problem, the 529 funds are protected. Declare bankruptcy? No problem, the 529 funds belong to the beneficiary, not to you. A $1200 investment, might grown to 20,000 dollars over 20 years.
2. Open (or fund) your IRA. IRA’s are the steroids of the personal finance world. No single device offers so many benefits. Here are a few: IRAs are good for retirement (obvioulsy); IRAs reduce your taxes; IRAs enjoy a fair degree of asset protection in most states, and are completely protected from lawsuits in some states.
3. Open a Roth. Roth IRAs are strange creatures. The contributions do not reduce your taxes, but the money in a Roth grows tax-free. Roths do enjoy asset protection in some states.
4. Pay off your credit cards. Credit cards are the cancer of personal finance. They impose the highest interest rates, typically for the most casual and useless of purchases, and the interest accrued and paid on credit cards offers no tax benefit.
5. Improve your home. Okay, so for this one you’ll have to pony up some dough at Home Depot or Lowes, but you’ll get a benefit: you’ll increase the value of your home.
6. Pay down your mortgage. Remember, you are always free to make a payment to the principal portion of your mortgage. You’ll reduce your monthly payment, and pay off your home faster.
7. Get your car serviced, and bank the rest. You probably have ignored this one. Why not change the oil, replace the air filter, and get your other service done. Your car will run better, save you money on gas, and last longer.
8. Donate to charity. Okay, I know, not as much fun as a ski weekend, but donating to charity will help others, and you’ll get a tax refund.