Use Your Tax Refund to Open an IRA

By Clifton Linton
Senior Writer, mPower

In This Story Easy Come ... Sort Of Manage Your Windfall The Rich Avoid Refunds

Of all the things the government gives you, a tax refund probably ranks as one of the best. If you are getting a refund this year, we suggest contributing it to an IRA. This is a relatively painless way to save for retirement — you don't have to squeeze your current budget to find the money.

Yet, financial planners advise that you shouldn't give Uncle Sam this interest-free loan in the first place. The fiscally savvy don't, and it's one reason for their financial success.

minute: read this article at a glance.

If doing your taxes feels like forcing down bitter medicine, then getting a refund should be like enjoying sweet dessert. This year it might be particularly saccharine because the IRS expects the average refund check to run $1,700.

Many deliberately increase their withholding to get this annual windfall, but then often don't have any life-enhancing plans for the money.

If you're due for a refund this year, what do you plan to do with the money?

"It's easier to save money that wasn't planned on than to cut back on something else." —Don Boegel, certified financial planner.

Without a specific plan it could get wasted away on daily incidentals or in a fit of consumerism. If you haven't already decided what to do with your refund money, or even if you have, here's an option that lets your refund money work as hard for you as you worked for it: Contribute it to an IRA.

You can choose between a traditional or a Roth IRA. With the Roth IRA, you will have to meet certain eligibility requirements. For more information about traditional and Roth IRAs click here.

Easy Come ... Sort Of

The upside of using this type of money for retirement savings is that, if you planned on contributing to an IRA this year, you don't have to go through the pain and aggravation of cutting it out of some area of your "working" budget.

"In a sense (a refund is) money that wasn't budgeted. It's eligible to be saved. It's easier to save money that wasn't planned on than to cut back on something else," said certified financial planner, Don Boegel, of Minneapolis.

The average $1,700 refund is just about enough to max out the annual-allowed $2,000 contribution for an IRA.

The Right IRA for You You may want to open a traditional IRA, if you can deduct the contribution from your taxes. If you can't deduct your IRA contribution you may want to open a Roth IRA, but first you need to meet the IRS' income limits. The IRA, traditional and Roth, qualification rules are a little complicated. Click here to visit the IRABCs and find the right IRA for you.

Manage Your Windfall

The two big advantages to opening an IRA now are: First, you'll have it already taken care of for 2000, and second, your money starts working for you immediately.

You can open an IRA for the 2000 tax year any time from January 1, 2000 to April 15, 2001, though many folks mistakenly wait until the last minute. By opening an IRA now, while you have the money in hand, you won't be scrambling at the end of the tax year to come up with $2,000 to get the tax deduction.

Plus, opening the account now will immediately put your money to work. "If you ... deposit $2,000 (now) for the current year, you get extra ... months of interest tax free. Over the years, that will amount to quite a bit of money," Boegel said.

Suppose you're 35 years old and expect to retire at age 65. Further suppose that on January 1, you had $2,000 to invest and you could get a 10% rate of return. After 15 months, on April 1, 2001, you would have $2,265. If you left that $2,265 in the bank, earning 10% interest for 30 years, you would end up with $39,523.

If you decided to wait until April 15, 2001 to invest that same $2,000, at the end of 30 years at a 10% rate of return, that money would grow to $34,899. That's a difference of nearly $5,000.

However, suppose you opened your IRA next month, when last year's tax refund arrives. Your money will be working for you an extra 10 months. That may seem insignificant, but by the time you retire in 30 years, you will have $37,813.

Take a look at the chart below to see how your IRA would do if you open it with your refund next month, as well as opening one at the beginning and end of the tax year.

The Rich Avoid Refunds

You should try to avoid getting a tax refund in the first place, financial planners say.

Why?

"The government doesn't pay interest on your refund," pointed out certified financial planner, David Strege, of West Des Moines, Iowa.

One of the secrets of the rich is that they figured out how to make their money work for them.

Strege advises calculating your approximate withholding so you won't have to make a big tax payment or get a big refund. Then you can take the money you were having withheld and invest it immediately. "Get the investments working for you in the year."

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Use Your Tax Refund to Open an IRA

By Clifton Linton
Senior Writer, mPower

In This Story Easy Come ... Sort Of Manage Your Windfall The Rich Avoid Refunds

Of all the things the government gives you, a tax refund probably ranks as one of the best. If you are getting a refund this year, we suggest contributing it to an IRA. This is a relatively painless way to save for retirement — you don't have to squeeze your current budget to find the money.

Yet, financial planners advise that you shouldn't give Uncle Sam this interest-free loan in the first place. The fiscally savvy don't, and it's one reason for their financial success.

minute: read this article at a glance.

If doing your taxes feels like forcing down bitter medicine, then getting a refund should be like enjoying sweet dessert. This year it might be particularly saccharine because the IRS expects the average refund check to run $1,700.

Many deliberately increase their withholding to get this annual windfall, but then often don't have any life-enhancing plans for the money.

If you're due for a refund this year, what do you plan to do with the money?

"It's easier to save money that wasn't planned on than to cut back on something else." —Don Boegel, certified financial planner.

Without a specific plan it could get wasted away on daily incidentals or in a fit of consumerism. If you haven't already decided what to do with your refund money, or even if you have, here's an option that lets your refund money work as hard for you as you worked for it: Contribute it to an IRA.

You can choose between a traditional or a Roth IRA. With the Roth IRA, you will have to meet certain eligibility requirements. For more information about traditional and Roth IRAs click here.

Easy Come ... Sort Of

The upside of using this type of money for retirement savings is that, if you planned on contributing to an IRA this year, you don't have to go through the pain and aggravation of cutting it out of some area of your "working" budget.

"In a sense (a refund is) money that wasn't budgeted. It's eligible to be saved. It's easier to save money that wasn't planned on than to cut back on something else," said certified financial planner, Don Boegel, of Minneapolis.

The average $1,700 refund is just about enough to max out the annual-allowed $2,000 contribution for an IRA.

The Right IRA for You You may want to open a traditional IRA, if you can deduct the contribution from your taxes. If you can't deduct your IRA contribution you may want to open a Roth IRA, but first you need to meet the IRS' income limits. The IRA, traditional and Roth, qualification rules are a little complicated. Click here to visit the IRABCs and find the right IRA for you.

Manage Your Windfall

The two big advantages to opening an IRA now are: First, you'll have it already taken care of for 2000, and second, your money starts working for you immediately.

You can open an IRA for the 2000 tax year any time from January 1, 2000 to April 15, 2001, though many folks mistakenly wait until the last minute. By opening an IRA now, while you have the money in hand, you won't be scrambling at the end of the tax year to come up with $2,000 to get the tax deduction.

Plus, opening the account now will immediately put your money to work. "If you ... deposit $2,000 (now) for the current year, you get extra ... months of interest tax free. Over the years, that will amount to quite a bit of money," Boegel said.

Suppose you're 35 years old and expect to retire at age 65. Further suppose that on January 1, you had $2,000 to invest and you could get a 10% rate of return. After 15 months, on April 1, 2001, you would have $2,265. If you left that $2,265 in the bank, earning 10% interest for 30 years, you would end up with $39,523.

If you decided to wait until April 15, 2001 to invest that same $2,000, at the end of 30 years at a 10% rate of return, that money would grow to $34,899. That's a difference of nearly $5,000.

However, suppose you opened your IRA next month, when last year's tax refund arrives. Your money will be working for you an extra 10 months. That may seem insignificant, but by the time you retire in 30 years, you will have $37,813.

Take a look at the chart below to see how your IRA would do if you open it with your refund next month, as well as opening one at the beginning and end of the tax year.

The Rich Avoid Refunds

You should try to avoid getting a tax refund in the first place, financial planners say.

Why?

"The government doesn't pay interest on your refund," pointed out certified financial planner, David Strege, of West Des Moines, Iowa.

One of the secrets of the rich is that they figured out how to make their money work for them.

Strege advises calculating your approximate withholding so you won't have to make a big tax payment or get a big refund. Then you can take the money you were having withheld and invest it immediately. "Get the investments working for you in the year."

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.