4 wise ways to spend your tax refund
A vacation would be fun, but you'll get more bang for your buck if you invest in energy-saving improvements or maybe even a new car.
This post is by Jonnelle Marte of MarketWatch.
Despite the late start to this year’s tax season, refund checks are already rolling in. About 75% of taxpayers are expected to receive refunds this year, according to estimates from the Internal Revenue Service, with the average check about $3,000. And as this winter windfall arrives, Americans wrestle with competing desires to spend, save or invest the cash.
Many people say they are being responsible with their refunds: 42% plan to use the money to pay down debt and cover bills and 25% plan to save it, according to a 2012 survey by TurboTax.
Others are splurging: 15% of taxpayers plan to treat themselves to a vacation or shopping. But advisers say that even if you’ve done everything right -- you have an emergency fund, no debt and are maxing out your retirement account contributions -- you might want to reconsider spending the refund on a 70-inch TV or a cruise. Here are some of their suggestions.
Rebalance your portfolio
With the stock market hovering near five-year highs, advisers normally would recommend investors rebalance their portfolios by selling stocks and using the proceeds to buy bonds or whatever assets they need to get back to their target allocations. But some investors might be able to rebalance without selling their stocks -- if they use their refund money to build up their exposure in those areas, says Steve Billimack, managing director at the HighTower Chicago Advisory Group.
"And it’s a very tax-efficient way to do it because they’re not selling anything to rebalance," says Billimack. (Investors typically need to pay taxes when they sell assets that have risen in value.)
Prepay your bills
Even if you’re not living paycheck to paycheck and could afford to spend your refund on a new iPad without falling behind on your bills, there may be better uses for the cash. Though it’s not nearly as exciting, one can use the money to pay off future bills, says Jon Beyrer, a financial planner in San Diego with Blankinship & Foster. “Why not use this money to put yourself ahead of the game?” says Beyrer.
Prepay six months of car insurance bills or car loan payments. Write the phone company a large check, or save the money for the home insurance bill you know is coming up in a few months, he says. But don’t forget to check monthly statements to be sure you aren’t paying for something you didn’t request, experts say.
Make home improvements
"If you’re going to spend it, take a look at your house," says Mike Blehar, managing director and principal at Fort Pitt Capital Group. "What have you been putting off?" If your furnace is on its last leg, now may be your chance to replace it, he says. Have you wanted to install new windows? Using the money on your home could lift your property value and prevent future damage, advisers say.
People who make energy-efficient improvements might also qualify for a residential energy tax credits expiring at the end of this year, says Blehar. To get the maximum credit of $500, taxpayers need to make $5,000 in qualifying improvements to their stoves, heating or air conditioning systems, insulation, roofs, water heaters and windows and doors. Learn more here.
Buy a car
If the list of needed car repairs is piling up, some advisers say it might be best to put your check toward a new ride. A $3,000 refund can cover the typical 10% down payment needed on a $30,000 loan for a new car or the 20% down payment needed on a $15,000 used car.
It also helps that banks are currently offering record-low interest rates on car loans, says Greg McBride, a senior analyst at Bankrate.com. The average rate on a five-year loan is hovering near 4% for a 5-year loan on a new car and 4.6% for a 4-year loan on a used car, according to Bankrate.com. And some banks and credit unions offer rates below 2.5% on both new and used cars, he says. People with existing car loans may also have a greater shot at refinancing to get a lower rate if they use some of their refund cash to reduce the size of their loan, says Beyrer.
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