Family Finances: What to do with your tax refund

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Getting a tax refund this year?

Of course, if you've lost a job, you'll need the money to live on. In that case, you'll want to put the money in a safe, high-yielding FDIC-insured liquid deposit account with as few strings attached as possible.

You can find some of the highest-yield money market accounts at www.bankingmyway.com. Just watch for fees and limitations, such as requiring you to use your debit card in stores or get your statements electronically. Fail to meet specified conditions and you could get charged.

Credit unions tend to offer higher rates than banks, but limit their membership. To find a credit union you may be eligible to join, go to www.cuna.coop.

Still working? You have a number of investment options for that check from Uncle Sam.

If your family is financially secure, consider funding your retirement account. That's one strategy that has served to advance our financial well-being over the years. Keep in mind, though, that you'll generally be subject to a 10 percent IRS penalty if you withdraw your money before age 591?2. That's on top of any other investment withdrawal fees your financial institution might charge.

You have until April 15 to make a 2008 IRA contribution, which can be up to $5,000 or $6,000 if you're over 50 years old. If you've already contributed, consider contributing for 2009.

Put your refund in a Roth IRA, and you won't get a tax deduction for the contribution, but after you reach age 591?2, you'll be able to withdraw tax-free.

If you're typically highly taxed and have no other pension plan, you might consider a traditional IRA instead. This way, you can deduct your contribution on your income taxes and have it grow tax-deferred until you retire.

Don't let financial institutions confuse you on the meaning of an IRA either. The term refers strictly to the IRS tax benefit you receive. The types of investments an IRA contains -- stocks, bonds, mutual funds or cash -- are up to the financial institution you select. So shop around for an institution that offers a wide variety of options, and avoid fees.

If debt is a problem, consider applying part of your tax refund to the outstanding principal of your highest-rate loan. Put the rest toward building up your savings so you needn't tap your emergency fund. You not only will save interest charges on the prepaid principal, but you'll also pay off your debt a lot faster.

Have no savings? In that case, you might wish to put all of your tax refund into a savings account.

If you're rolling in the dough and have maxed out on IRA or 401(k) plan contributions, fixed annuities are another option. Their yields look attractive -- running as much as 4 percent tax-deferred. But beware that the interest rate may be subject to change, and if you don't like your new rate, you could pay severe penalties if you cash out early. Also unlike bank CDs, fixed annuities, which are issued by insurance companies, are not backed by the U.S. government.


Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is "Quick Steps to Financial Stability" (Que/Penguin). You can contact them at www.moneycouple.com .


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