Smart Uses for Your Tax Refund

During difficult economic times, it’s especially valuable to get extra money in your pocket. Here are smart uses for your tax refund that could make a long-term difference in your finances.

Benefit from tax-advantaged investing. Investing in a 457 retirement plan lowers your taxable income, and the money grows tax-deferred for retirement. Because your contributions escape taxes, they don’t lower your take-home pay as much as you might expect: If you get a $750 refund, for example, you can actually afford to contribute $1,000 to your 457 plan, if you’re in the 25 percent federal tax bracket. The contribution limits for 457 and 401 plans increased on January 1, 2009, and you may be able to add even more money if you’re 50 or older or nearing retirement.

And you have until April 15, 2009, to make your 2008 contribution to your IRA (the limits are the same as 2009). Money in a Roth IRA doesn’t lower your current tax bill, but it grows potentially tax-free for the future. Investing just $416.67 per month gets you to the $5,000 limit by the end of the year.

Please visit ICMA-RC's Web site for more information about the contribution limits for 2009 or contact ICMA-RC’s Investor Services at 800-669-7400.

Pay off high-interest credit-card debt. Paying off a credit card with an 18 percent interest rate is like earning 18 percent on your investments—and can save you hundreds of dollars in interest that you can use to improve your finances.

Boost your emergency fund. Add more money to your emergency fund so you have at least six months’ worth of expenses in a safe and liquid account, such as a money-market account. Having this extra cushion can help you avoid falling into debt if you have unexpected expenses or a drop in income.