Tuesday, March 11, 2008

Tax return choices...

If you are one of the lucky few out there who will be blessed with a big tax refund and would like to know what are some of the best options during a recession like economy then here are some top choices:

1. Shore up your short term reserves
Normally, this would be #2 but in an economy like the current one, having some reserves is a pretty good idea. How much you say? Personally, 3 months salary works for me but many experts recommend 6 months. My personal favorite for this would be ING Checking where you can get a free $25 just for opening and funding an account with a minimum of $250. That's an instant 10% by my calculations not to mention the 2% APY on a CHECKING account.

2. Pay off any high interest (>3%) debt
Assuming you have short term reserves, paying off high interest debt is always the BEST thing to do. I mean, it doesn't take much sense to see that if you are earning 5% (before taxes) on your investments but paying 8% in interest that you are losing the fight. A beatdown to be exact.

3. Continue to fund your retirement
More specifically, continue to fund your (401K, Roth IRA, Roth-401K, IRA, etc) accounts. As always, if your employer matches your 401K contributions you should contribute the minimum to get the maximum employer match. Free money is free money. With regards to fund selections it is always recommended to find low cost broad index funds and I continue to receive the best service with a wide array of low cost choices from Vanguard.

4. Adjust your withholdings
Yep, if you don't want a repeat of getting your own money back next year interest free you may want to adjust your witholding. Ideally, you want to shoot for break-even ($0 refund/owed). In the situation where I must lean one way I prefer to owe the IRS a SMALL amount than having them owe me. Hey, last I checked they don't pay interest.

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