Any Tax Refund Advice

stolenidentityApril 8, 2009

I'm not sure what to do with a small tax refund. Put it in a cd? Add it to existing bank savings account which is earning diddly in interest? Purchase some other type of retirement account? Maybe just cash the thing and put the money in a coffee can?

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I don't think they do CD's for amounts under $100.

What is your definition of a small tax refund?

    Bookmark   April 8, 2009 at 11:09PM
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Hi Sasafras,

In a savings account/CD/money market acct. ... you must pay some to tax. Plus, since number of dollars in asset can't grow, inflation erodes its value annually ... so you must add value of inflation to the basic asset in order to preserve purchasing power.

You can keep what's left.

Into the coffee can ... no income ... so no tax. But - you still lose to inflation ... so you're going downhill, even faster.

Can you handle about a score of questions - you read correctly, more like a score than a dozen.

Are you receiving employment income ... and does your family depend entirely on one income or are there two available (i.e. - how secure?)?

Are you retired and receiving a pension ... do you have investment income as well ... do they meet your current operational needs?

If we were dealing with a long-term financial plan here, I'd ask whether your retirement incomes were at least partially indexed, and at some time would want to evaluate with you how long you wanted that retirement income to last and whether you'd evaluated for inflation.

If employed, how secure is your current income? Are you worried about layoff?

How probable may it be that a money-hungry emergency may crop up? Any idea how soon?

Do you have some extra asset that's available quickly, in case of emergency?

Many financial advisors recommend that most people have 3 mos.' income available in case of emergency, layoff, etc. - and feel more comfortable with 6 - 9 mos.', or even up to a year's worth, depending on the possibility of major emergency, paycheque going up in smoke, etc.

Those who have a financial cushion on hand in case of need can rest a lot more comfortably at night than those who lack it!

Under certain circumstances, I might be willing to have lower concern about that emergency fund immediately available: I often don't have it, myself ... but I have an alternate plan in place.

Do you have current debts, e.g. credit card, fuel bill, etc? At what interest rate levels? Is it deductible?

For example, if you carry credit card balances owing over due date, do you know what rate of interest they are charging? On regular cards, usually 15 - 18%; on store-issued cards, usually 25 - 28%, sometimes more.

It may well be a good idea to use it to pay off some of the outstanding debts, especially the high-priced ones.

How long do you think that you may want to leave this money invested? One month? Six months? One year? Six years? (Sixty years?)

What kind of investments do you have now?

How long do you expect to have them operational, e.g. do you plan to draw some down in the short/medium to buy a car, send kids to school, buy a home/cottage, etc.

Are they producing a good rate of return? Is there a possibility of some growth?

Are they reasonably well diversified?

If you plan to liquidate some ongoing investments to buy something soon, maybe invest this money in savings account, Money Market, etc. and leave the other investments alone ... especially if there is some capital gain developed that you'd have to pay tax on if you were to liquidate them soon.

Would you feel comfortable using some of your refund to make some investment in equities, ordnarily?

How about now ... with the market having gone down substantially ... many are saying that stocks are on sale, these days!

There's been some recovery, but they may go either up or down from here. They may be on fire sale, later. But if they go up from here ... and keep going up ... in a couple of years you'll be kicking yourself ... wishing that you'd bought some now.

When no one knows where the bottom of the market is ... best to buy some, periodicallly, over a substantial period ... though they may go down some more in the short term ... quite likely you'll be pleased with the rate of return on almost all of that series of investments, in three, four or five years.

Almost certainly in 10 years. Do you figure on dyin' before that?

Do you have some of your assets denominated in currencies of other parts of the world?

The reasoning behind the advice that we should diversify our types of investments works here, as well - not a good idea to have all of one's assets in the financial system of only one country.

I may think of some more questions later ... but that's about enough for now, ... don't you agree?

Good wishes for increasingly skillful management of your income and assets - looking not just to the present, but to the whole term of your life. Maybe even stretching into the lives of your offspring, if you have some.

ole joyful

P.S. Now at age 80, I have 80% of my assets in equities ... if I kick the bucket next week, there'll be taxes to pay and some monies to be given to charities (and my executor's been told to gift the stocks with the highest level of capital gain to them directly, which provides a receipt for the full value ... and means that I/my estate escapes tax on the capital gain that's been developed over their life.

Also ... my kids don't need the money, so won't need to cash the equities for a while ...

... so they can keep on growing, providing increase in the basic value of the equity, even if it fluctuates from time to time ...

... and on annual payout from several of them, which tends to rise, over time, even if it does vary from time to time.

o j

    Bookmark   April 8, 2009 at 11:27PM
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That's the question - what's a small refund?

Very little is paying big returns. Tying your refund up for 13 months or 37 months or 5 years plus 1 month in a CD gets you anywhere from 1.75% on up to not really considerably much more.

To be perfectly frank - throwing a "small" refund in a drawer just to have cash on hand - especially if we're talking a few hundred vs a few thousand - isn't all that different than throwing it into an interest bearing checking account. (I'm not averse to throwing a few thousand in a drawer - but that's me.)

    Bookmark   April 9, 2009 at 11:07AM
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#1 use: pay off any revolving credit debt, and don't ever carry a balance. Make sure you never charge more than you can pay off as soon as you receive the bill.

#2: Is your savings account sufficient for 6-12 months net expenses? If not, add the money to savings. It isn't how much interest you are earning, it is liquidity that is important. BTW, you don't need to keep the money in your local bank or credit union if they're not paying much. Open an on-line FDIC-insured account, keeping just $1-2K in your local bank for immediate same-day transfer but letting the majority of it earn a couple more percentage points. An on-line savings account generally takes 3-5 days to transfer to your checking.

Inflation is essentially zero. Earning 2.5% is fine when that's your real yield on liquid assets.

    Bookmark   April 9, 2009 at 1:34PM
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I would use the $$ to pay off whatever was keeping me awake at night (right now new heating, AC). Whatever debt, whatever worn out appliance or vehicle. If you are wondering what to do with it, your immediate needs are apparently taken care of.

Spend it where you will get the most pleasure.

    Bookmark   April 9, 2009 at 4:21PM
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Thank you, everyone for your .02!

    Bookmark   April 10, 2009 at 11:39AM
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1. pay off debt
2. get an emergency fund
3. put to your retirement
4. invest it

    Bookmark   April 11, 2009 at 10:00AM
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If you're getting a huge refund, you need to rethink your tax strategy. You're loaning the government money, with no interest. Wouldn't you rather have the money during the year?

    Bookmark   April 12, 2009 at 5:50PM
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Hi idee fixe,

As she said that it was a small refund, I didn't suggest, as I have often, that it would be a good idea to arrange things to reduce one's deductions to let one have nil or minimum refund ... meaning, as you say, that they've made an interest-free loan to the government of part or all of the refund, which is achieved at the end of December and carries through until the refund is received or the middle of June, whichever is earlier.

If Sassafras hasn't been strongly aware of this aspect of the income tax refund situation, it's a good thing to have it brought to her attention.

Thank you for doing so.

ole joyful

    Bookmark   April 13, 2009 at 9:09AM
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