Wednesday, February 17, 2010

What to do with a tax refund


So, you have a large sum of money in your hand. What should you do with it?
It's that time of year again; tax time. Most people don't have an accurate W-4 on file with their employer so they will get a tax refund. When you get your tax refund this year, you may want to consider saving it. We live in uncertain times and saving is never a bad idea. So, you have a large sum of money in your hand. What should you do with it?
Savings Accounts are offered by most banks. There is usually a small minimum amount to open the account and some will charge a maintenance fee if it drops under a certain amount. These types of banks are typically used as overdraft protection. They tend to have very low interest rates.
Money Market Accounts are also a bank offered account. While MMAs are similar to savings accounts there are differences. They usually have higher minimum balances and a limit on the amount of withdrawals you can make per month. The trade off is that they have higher interest rates and some offer the ability to write checks against your balance.
Certificates of Deposit are offered by your bank. They are in essence you loaning your bank money for a set period of time. In return they will give you a predetermined amount of interest on your money. The downside to certificates of deposit is that the money is considered untouchable. While you can technically withdraw the money, you will take a penalty on the interest earned. If the interest rate is good and you will not need the money, consider using this option.
Roth IRA is a retirement plan. You can open one through many companies. Some companies will have a high deposit requirement. Some companies such as ING do not. Roth IRAs are a good investment tool for your future. You should be aware that there is a maximum amount of money you can contribute to your IRA per year.
A Debt Snowball plan is not strictly speaking a savings tool. The money you pay to get rid of debts however will save you in interest in the long wrong.
Investing should be considered if you already have an emergency account, no or low debt, and have fully funded a retirement program. You can use a program such as Sharebuilder and do it yourself or you can contact a financial advisor for assistance.
By no means is this meant to be an exhaustive list. There are other options such as savings bonds and educational funds. Make sure to do your research before you commit your money anywhere.

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