What are you going to do with your tax refund?

Taxes

According to the IRS, the average tax refund last year was about $2800. That’s a lot of money. Let’s look at that a couple different ways.

$2800 is the same as:

  • $233 a month
  • $116 if you’re paid twice a month
  • $107 if you’re paid bi-weekly
  • $53 if you’re paid weekly

That would be a pretty nice raise if you got that money in each of your paychecks. We’ll talk more about that in a future post. For now, let’s look at some ideas on how to use this year’s tax refund.

It’s always nice to get a big pile of money unexpectedly. It’s sad to find out after a while that it disappeared and you’ve got nothing to show for it. Below are some ideas on how you might use your tax refund this year.

  • Pay off some debt. Since you’re probably paying interest on any debt that you have, paying it off makes your tax refund that much more valuable by saving you interest every month.
  • Start or build an emergency fund. Emergency funds are far from exciting, but on the bright side, once you’ve got one, unexpected events aren’t such a crisis.
  • Put it in an IRA for retirement. You can start the year by cutting your tax bill for the next year by putting your refund right into an IRA. Whatever you contribute to a traditional IRA can be a deduction if you itemize your taxes.
  • Start a 529 college fund for your kids. Depending on where you live and in which state you start a 529 college savings plan, you can get a lot of great benefits that a savings account won’t provide.
  • Buy something big you’ve been looking at. If you’ve been planning to buy something like a new computer, furniture, or something else that isn’t exactly “cheap”, using your tax refund can get you that item that much faster. Plus, if you’ve saved money for that special item you can use it for something else now!
  • Plan a vacation. It may not sound like the most responsible thing to do, but paying cash for a vacation is better than putting it on a credit card.
  • Start a business. I’m sure you didn’t expect to see that on the list. If you’ve ever thought about starting a business but have always used not having the money as an excuse, now’s your chance. It may be the catalyst to make a dream come true.

Don’t let your tax refund (or any unexpected dollars) slip away. Make a plan for it, even if the plan is to spend it frivolously. At least you’ll know where it went.

How do you plan on spending your tax refund? Post your ideas in the comments below.

Featured Image courtesy of Arvind BalaramanĀ / FreeDigitalPhotos.net

What is a Roth IRA and why do I need one?

Beach

I’ve been pretty focused on finding products and services that will save you money in each post. However, this week, I wanted to take a break from the usual and discuss the Roth IRA. I’m sure everyone has heard of them by now, but perhaps you’ve still got some questions. Well hopefully I’ve come up with just about every question you might have and answered them below. If there is a question that I missed, please post it in the comments and I’ll get the answer for you as quickly as possible.

What is a Roth IRA?

A Roth IRA is a type of retirement account that usually contains one or more mutual funds.

What makes a Roth IRA special?

When you put money into a Roth IRA, you put add to it after tax money, which means the money that you take home in your paycheck. The special part about this is that it grows TAX FREE since you used after tax money to fund it.

Grows tax free? What does that mean?

It means that if you put in $1000 into your Roth IRA and it grows over several years to say $50,000, you can withdrawal money out at retirement and not pay taxes on any of it, including the growth. If you had $50,000 in a 401k and decided to pull it all out at once, it would turn into something like $35,000-40,000 after taxes are paid to the IRS. Plus, who knows what tax rates will be like in the future. If they go up a lot, then you would get even less from your 401k when you make withdrawals.

Can I contribute to a Roth IRA?

As long as you have a job and report your earning on your taxes, you should be able to contribute to a Roth IRA. There are income limits however. If you are married filing jointly and make $178k or more, or you’re single and make $112k or more, you should check with a professional to make sure that you can contribute to a Roth IRA.

When can I take money out of my Roth IRA if I start one?

When you turn 59 1/2 you can usually start withdrawing money from your Roth IRA as long as you’ve been putting money in for at least 5 years. You can take your contributions out at any time before 59 1/2, but if you touch the earnings or growth, you’ll be paying a penalty. It’s best to leave it alone if at all possible. For example, if you put in $5500 each year for five years and then one year you decide that you want $2000. You won’t be able to put in $7500 the next year to try to repay the amount you took out.

But I’m a stay at home mom, can I still open a Roth IRA?

As long as your spouse is working, you can open a spousal Roth IRA and contributions can be made on your behalf up to the limit.

How much can I contribute to a Roth IRA?

The limit is currently $5500 ($6500 if you’re 50 or older) for you and your spouse, for a total of $11000. However, you can’t contribute more than you made so if by some chance you made less than those amounts, that would be your cap. Chances are if you make less than that, you’ve got bigger concerns than contributing to a Roth IRA.

Can I start a Roth IRA for my child?

In most cases, the answer is no, unless they made money and you file a tax return for them. So if you’ve got a child actor on your hands, then you might as well start a Roth IRA early for them to maximize the savings.

What does it mean to put money into a Roth IRA?

When you invest in Roth IRA, what you’re really doing is putting money into an investment, such as a mutual fund under a Roth IRA umbrella. The Roth IRA umbrella is what determines how the IRS treats it.

I hope this has been helpful. Before opening a Roth IRA, I would suggest speaking with an investment professional to make sure that you invest in mutual funds that meet your desired goals.

Featured Image courtesy of Vichaya Kiatying-AngsuleeĀ / FreeDigitalPhotos.net