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Before you start to think of ways to spend your tax refund, think of how you could invest them for future growth potential.
If you have already filed your tax return, you may be feeling relieved. But if you are one of many people who are planning to receive a tax refund, your work is not done. Before you start to think of ways to spend your newfound dollars, think of how you could invest them for future growth potential.
Let's take a look at an example: Say you receive $300 as a tax refund. If you invest that $300 at an 8% annual compounded rate of return for five years, you'll then have $441.The same $300, if invested for 15 years at an 8% annual compounded rate of return, would give you $952. (Please keep in mind that these examples do not reflect the performance of any particular investment.)
Before you invest your tax refund, it is important to prioritize your investment goals. Do you want to save for retirement? Do you need to pay for your child's education? Would you like to purchase a new home? Once you decide what your financial needs are, you can better plan how to invest your tax refund. Here are a few ideas:
• Talk to your financial consultant about diversifying your portfolio by investing in a new stock. This can give you a chance to invest in other sectors of the market, or invest in your dream stock.
• Increase the percentage you contribute to your 401(k). Contributions help reduce your taxable income, which puts more dollars in your pocket. This extra contribution also can really make a difference in the total value of your 401(k), especially if your employer matches a percentage of your contribution.
• Start an Individual Retirement Account and start taking advantage of even more tax savings. Even if you already have a 401(k), an IRA can be a powerful savings tool. If you aren't sure what kind of IRA to open, consider these differences, then contact your financial planner: A traditional IRA lets you contribute a maximum of $2,000 of your earned income annually. These contributions may even be tax-deductible, and you won't have to pay taxes until you start making withdrawals after age 59. A Roth IRA also lets you contribute a maximum of $2,000 annually of your earned income, but your contribution is not tax-deductible. This means that when you start making withdrawals at age 59, you will not have to pay taxes as long as your investment has been in the Roth account for at least five years.
• Open a custodial account for your child and start teaching him or her the value of investing. A custodial account is an account that you establish and manage for your child until he or she reaches the age of majority, at which time the account is turned over to his or her control.
• Start a 529 plan for your child and begin saving for his or her college tuition. In some cases, you can open an account for as little as $15 with a commitment to make monthly contributions. A 529 plan allows the parent to maintain control of the account, and the investment grows, tax-deferred (taxes due upon withdrawal for nonqualified buyers will trigger a 10% penalty on earnings.)
If you're not sure what to do with your refund, contact your financial consultant and discuss ways you can put your money to work for you. PR