Putting your tax refund to work!

Where could that money go besides a bank account?
Should your refund be saved? According to a TD Ameritrade poll, 47% of U.S. taxpayers expect a refund this year. What do they plan to do with the money?1

The answers may surprise you. While 15% of the survey respondents indicated they would spend
their refunds on discretionary purchases, 47% said they would save the money
and 44% indicated they would use some or all of it to whittle away some debt. Just
15% said they would invest it, and only 6% said they would direct it to a

Besides deposit accounts, consider other destinations.
Putting your refund into your savings or checking account is sensible enough –
but with the interest rates most bank accounts earn today, you may be wondering
about alternatives. Here are some other options.

Your refund could let you put more money into your workplace
retirement plan.
Does your employer offer to match your
retirement plan contributions? If so, you might want to think about contacting
your plan administrator or human resources officer and increasing your elective
salary deferrals into the retirement plan this year by the same amount as the
refund. If you deposit those refund dollars in a checking or savings account,
you can offset the increase in the amount of salary you defer by distributing
the refund dollars from the bank account to yourself. Hopefully, that checking
or savings account generates at least some interest on those deposited funds as

It could help you increase your 2012 (or 2013) IRA contribution. If you didn’t make the maximum
allowable IRA contribution for 2012 – $5,000 across all of your traditional and
Roth IRAs, $6,000 for those 50 or older – you could boost that contribution as
a byproduct of your refund.2
Assuming you haven’t sent your 2012 federal return to the IRS yet, you can redo your taxes
to show your 2012 IRA contribution(s) raised by the amount of the refund you
will be getting. As the deadline for 2012 contributions is April 15, 2013, you
could either make your additional 2012 IRA contribution using your refund (if
you file early and get your refund back nice and early) or with equivalent cash
from your savings or checking account, knowing that you will then use the
refund to reimburse yourself. Whatever way you choose, please make sure that
you earmark your additional contribution for the year 2012; otherwise, the IRA
custodian will interpret it as a contribution for this year. (If you’ve already
sent your 2012 taxes to the IRS, you could still pull this off with the help of
a 1040X form to amend your return).2
Another option: use the refund you get from your 2012 taxes to increase your 2013 IRA
You could tell the IRS to put the money in bonds. Starting in 2011, the IRS gave taxpayers who
received refunds a third option: in addition to a direct deposit or a check in
the mail, their refunds could be redirected into U.S. Series I Savings Bonds.
Up to $5,000 of refund dollars can be invested this way (in multiples of $50).3
You could use the dollars for home improvement. If
you want to go green (or even greener) and you have the time, initiative and
patience to tackle an energy-efficient home improvement project, here is
another option.
You could get as much as a $500 tax credit for your effort.2
You could make an additional mortgage payment or pay property tax. Assuming your home isn’t
underwater, you may want to use the refund dollars to reduce mortgage
principal. Also, mortgage companies often keep a few thousand bucks in escrow
to pay various tax and insurance expenses linked to your home, and some of them
will actually let a borrower’s savings account stand in for their escrow
account. If they permit, you could make such payments out of an account of your
own while it earns a (tiny) bit of interest.2

Lastly, think about avoiding a refund in 2013. In figurative terms, your federal tax refund amounts
to an interest-free loan to Uncle Sam. If you don’t particularly want to make
that “loan” again, see if your W-4 can be tweaked to decrease that possibility
this year.

Reeve Conover can be reached at 877-423-9990, or at reeve@reevewillknow.com

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2 – www.cnbc.com/id/100457342

3 – www.irs.gov/uac/Ten-Things-to-Know-About-Tax-Refunds