A column on personal finance prepared by the Virginia Society of Certified Public Accountants


(March 19, 2003) - The average tax refund check issued in 2002 was for more than $1,900, according to the Internal Revenue Service. While tax refunds are not windfalls – you’ve actually given the IRS an interest-free loan of your hard-earned money – you should think carefully about how you plan to use this money.

When it comes to making your tax refund work for you, there’s no one right answer for all families, says the Virginia Society of CPAs. For some, paying off debt will provide the greatest peace of mind. Others might find a new investment is the way to go. For others still, the freedom to spend some money without worrying about upsetting the monthly budget provides a much-needed psychological boost. The important thing, say CPAs, is to carefully think through the best use of your tax refund before spending it impulsively.

Pay Down Credit Card Debt

If you’re paying double-digit interest rates on credit card debt, using your refund check to pay down your debt makes excellent financial sense. In fact, there’s a double benefit for you. Not only do you eliminate or reduce the amount you owe on your credit card, but you avoid additional interest payments which add to your debt. CPAs recommend that you pay off the credit cards with the highest interest rates first.

Build an Emergency Fund

As a general rule, CPAs and other financial professionals recommend that you set aside three to six months of living expenses to carry you though an adverse event, such as a layoff or illness. If you don’t already have an emergency fund, your tax return can help you get one started. Just be sure to keep the money in a fairly liquid investment, such as a money market account or short-term CD.

Save for Retirement

A good place to invest your refund check is in a retirement account, where, over the years, even a small contribution can make a big difference. If you’ve been putting off opening an IRA until you had “a little extra money,” here’s your chance.

A tax refund also can be a boon for workers with 401(k)s. For example, if you are contributing 3 percent to a 401(k) plan that allows you to put in more, consider increasing your contribution rate. You can use your tax refund to help offset the extra amount being taken out of your paycheck.

Start Investing or Add to Your Portfolio

If saving money from your weekly paycheck is difficult, investing your tax refund check can give you a jump start on creating an investment portfolio. You might want to start with a mutual fund that has a low minimum opening deposit.

If you have an existing portfolio, your refund check provides a good opportunity to invest in a new stock or to improve the diversity of your portfolio.

Add it to Your Mortgage Payment

For many taxpayers, making an extra payment toward the principal on your mortgage makes better financial sense than putting the money in a savings account. Trimming an extra $500 or more off your principal now can save you thousands of dollars in interest payments over the next 30 years. Here’s another option: if you’ve been thinking about refinancing your home mortgage, but didn’t have enough cash to cover closing costs, your tax refund check can bring you closer.

Spend Wisely

Using your tax refund for an important purchase, such as a new computer or a major appliance, rather than buying it on credit, means you’ll avoid interest payments and have more money in your monthly budget to save or spend on necessities.

Start or Add to a College Fund

If you've got kids headed for college, you might consider earmarking that tax refund check for an Education IRA. In 2003, qualified taxpayers can deposit up to $2,000 in an Education IRA per beneficiary. Section 529 plans are another great way to save for future college bills. Under new legislation, earnings in such funds can be withdrawn tax free if used to pay for qualified education expenses.

Make a Donation

You might also think about using your refund check to help the less fortunate. Not only will you help someone in need, but the amount you donate can be deducted on your tax return for 2003. Be sure you get a receipt for your donation from the charitable organization.

Have some fun

For some, a tax refund is a windfall to be spent on something exciting and unexpected. If you’ve worked hard all year and saved diligently, you might just want to put the money toward a well-deserved vacation. Even a brief escape can reenergize you, and that’s a better return on your money than a pile of cash register receipts.

Finally, depending on the size of your tax refund, you may want to consider contacting your CPA for some financial planning advice. You can then apply the refund to specific financial goals.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at

Lifetime Financial Planning, LLC

2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171

208 South King Street, Suite 201, Leesburg, Virginia, 20175

Phone: (703) 779-0515 - Fax: (703) 779-7815 - E-mail:

Hourly Fee Only | Financial Planning | Investment Advice | College Savings Plans |
College Financial Aid | Tax Planning & Prep | Planner Profile | Media - LFP in the News | Links to Financial Info | Questionnaire | Contact Us | Home |

©2001-2003 Lifetime Financial Planning, LLC All Rights Reserved