FINANCIAL FOCUS – What Should You Do With Your Tax Refund?

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You may not get much of a thrill from filing your taxes, but the process becomes much more enjoyable if you’re expecting a refund. So, if one is headed your way, what should you do with the money?

The answer depends somewhat on the size of the refund. For the 2017 tax year, the average refund was about $2,760 – not a fortune, but big enough to make an impact in your life. Suppose, for example, that you invested this amount in a tax-deferred vehicle, such as a traditional IRA, and then did not add another penny to it for 30 years. At the end of that time, assuming a hypothetical 7 percent annual rate of return, you’d have slightly more than $21,000 – not enough, by itself, to allow you to move to a Caribbean island, but still a nice addition to your retirement income. (You will need to pay taxes on your withdrawals eventually, unless the money was invested in a Roth IRA, in which case withdrawals are tax-free, provided you meet certain conditions.)

Of course, you don’t have to wait 30 years before you see any benefits from your tax refund. If you did decide to put a $2,760 tax refund toward your IRA for 2018, you’d already have reached just over half the allowable contribution limit of $5,500. (If you’re 50 or older, the limit is $6,500.) By getting such a strong head start on funding your IRA for the year, you’ll give your money more time to grow. Also, if you’re going to “max out” on your IRA, your large initial payment will enable you to put in smaller monthly amounts than you might need to contribute otherwise.

While using your refund to help fund your IRA is a good move, it’s not the only one you can make. Here are a few other possibilities:

  • Pay down some debt. At some time or another, most of us probably feel we’re carrying too much debt. If you can use your tax refund to help reduce your monthly debt payments, you’ll improve your cash flow and possibly have more money available to invest for the future.
  • Build an emergency fund. If you needed a new furnace or major car repair, or faced any other large, unexpected expense, how would you pay for it? If you did not have the cash readily available, you might be forced to dip into your long-term investments. To help avoid this problem, you could create an emergency fund containing three to six months’ worth of living expenses, with the money kept in a liquid, low-risk account. Your tax refund could help build your emergency fund.
  • Look for other investment opportunities. If you have some gaps in your portfolio, or some opportunities to improve your overall diversification, you might want to use your tax refund to add some new investments. The more diversified your portfolio, the stronger your defense against market volatility that might primarily affect one particular asset class. (However, diversification, by itself, can’t protect against all losses or guarantee profits.)

Clearly, a tax refund gives you a chance to improve your overall financial picture. So take your time, evaluate your options and use the money wisely.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.

Marques Young
Edward Jones Investments
8001 Centerview Parkway, Suite 112
Cordova, TN 38018
Office: (901) 751-0634
Email: marques.young@edwardjones.com
Member SIPC

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SHOULD YOU FILE AN EXTENSION ON YOUR TAX RETURN?

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If you’ve been procrastinating when it comes to preparing and filing your tax return this year you might be considering filing an extension. While obtaining a 6-month extension to file is relatively easy–and there are legitimate reasons for doing so–there are also some downsides. If you need more time to file your tax return this year, here’s what you need to know about filing an extension.

WHAT IS AN EXTENSION?

An extension of time to file is a formal way to request additional time from the IRS to file your tax return, which in 2017, is due on April 18. Anyone can request an extension, and you don’t have to explain why you are asking for more time.

  • Note: Special rules may apply if you are serving in a combat zone or a qualified hazardous duty area or living outside the United States. Please call the office if you need more information.

Individuals are automatically granted an additional six months to file their tax returns. In 2017, the extended due date is October 16. Businesses can also request an extension. In 2017, the deadline for most businesses (whose tax returns were due March 15) is September 15th (October 16 for C-corporations).

  • Caution: Taxpayers should be aware that an extension of time to file your return does not grant you any extension of time to pay your taxes. In 2017, April 18 is the deadline for most to pay taxes owed and avoid penalty and interest charges.

WHAT ARE THE PROS AND CONS OF FILING AN EXTENSION?

As with most things, there are pros and cons to filing an extension. Let’s take a look at the pros of getting an extension to file first.

Pros

1. You can avoid a late-filing penalty if you file an extension. The late-filing penalty is equal to 5 percent per month on any tax due plus a late-payment penalty of half a percent per month.

Tip: If you are owed a refund and file late, there is no penalty for late filing.

To check out the rest of the tips go to VAAS Professionals.

Written by Steve Julal of VAAS Professionals

Steve

VAAS Professionals, LLC
325 Edgewood Avenue, S.E
Atlanta, GA 30312
www.vaasprofessionals.com