Ask Karen Gibbs

Veteran business correspondent Karen Gibbs answers your personal money questions and addresses current topics that affect YOUR finances on a daily basis. Karen is the financial expert in your corner--no question is too basic or too small. Karen boils down the issues simply: here's what you need to know, and here's what you need to do. Send your money questions to AskKaren@mpt.org and post your comments below.

11

February

What to do with your tax return

Karen Gibbs

Hi Karen, I’m working on my 2015 Federal tax return and it looks like I’m going to get a sizeable refund.  How would you suggest I use this windfall?

- Anna, White Marsh

 
BudgetingThanks for your question, Anna, and congratulations on the windfall.  Not knowing much other than you’re getting as a refund, I’ll give you some generic advice.
If you’re carrying a balance on any credit card(s), I would target some of the refund toward paying off that debt.  Credit card annual percentage rates (APR) average more than 17% annually.  On a $1,000 balance, that amounts to $170 in interest.  Paying off that $1,000 will save you $170 – money that you can use elsewhere.


Do you have an emergency fund?  Conventional wisdom says you should have six months of expenses saved in case you encounter an emergency such as job loss, illness or divorce.  You should have money saved to cover fixed expenses such as rent, car note and insurance, but you should also factor in variable costs such as food and childcare.  As the labor market continues to lag the overall economy, it may take longer than six months to find another job.  Six months of expenses may not be enough.


Have you started saving for retirement?  It’s never too early or too late to start saving for retirement.  Half of Americans households have no savings whatsoever; no 401(k) plan, no company pension, no IRAs, no personal savings.  According the Government Accountability Office (GAO) 29% of Americans over 55 years of age have no pension or retirement savings plan.  The average social security monthly benefit as of January, 2016 is $1,341.  Can you live off of that?
Take some of your tax refund money and fund a Roth IRA.  Roth IRAs are different from traditional IRAs in that they are funded with after-tax dollars.  What you put in along with your investment gains are tax free upon withdrawal at age 59-1/2.  The earlier you start funding your Roth IRA, the more time it has to grow and the more money you can withdraw tax free in your retirement.


I’m a big believer in helping yourself first.  Once you’ve set up your own emergency fund and retirement fund, you can start funding your children’s college education fund.  Many may take issue with this, but your children can get a loan for college tuition; you cannot get a loan for retirement.  Take care of yourself first and then worry about the children and grandchildren.


Lastly, if you’re getting a large tax refund every year from the IRS, consider adjusting your withholding by modifying your W-4 form with your employer.  While it’s nice to get a big refund, you’re not earning any interest on the money you’re loaning to the U.S. government.  By adjusting your withholding, you can get use of that money every month instead of waiting until tax time to reap your rewards.  Go to the IRS Witholding calculator and plug in your numbers.  You can increase or decrease the amount the government withholds from your monthly paycheck.


Good luck!

-Karen

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