Five wise ways to put your tax check to work

Caroline Nielson already knows what she's doing with her federal income tax refund. Ms. Nielson, an employee of Amtrak, is using her refund check to pay for a dream trip with her sister to Paris this summer.

"I'm very responsible when it comes to money," she says. "But my refund check is a lot larger than in the past and it's a trip that we have been looking forward to for years."

If you're like Nielson, and the majority of America's 130 million taxpayers, a refund check from the Internal Revenue Service should soon be arriving in your mailbox. And this year, you should be getting a little extra money back from Uncle Sam.

Early refund statistics show that the average refund is up $97, or 4.5 percent from last year, to $2,292. Historically, about 77 percent of taxpayers get refunds. And many of them treat the windfall as "found money."

"There's a natural urge to want to just go out and blow it all, but I think people also have to think of ways to make that refund money work for them," says Steven Street, an accountant with Ross & Moncure in Alexandria, Va.

The decision about what to do with that refund check depends upon your individual financial position. But some recent research appears to indicate that most Americans are not just going out and buying plasma-screen TVs. Of those taxpayers who got early refund checks from President Bush's tax-relief bill in May, 18 percent put the money in the bank, 33 percent paid off bills, 20 percent spent it on everyday items, 15 percent paid off credit cards, and only 2 percent invested their money, according to a December 2003 survey by the Cambridge Consumer Credit Index.

With the April 15 deadline for filing tax returns looming, here are five ideas about how to make that refund check work for you.

With most credit-card interest rates at 14 percent and above, this can be one of the costliest items in your monthly budget. Reducing credit-card debt - or eliminating it altogether - can be one of the best financial decisions you can make, financial planners say. It may not be a glamorous way to spend your refund check, but it makes great financial sense in the long term.

"I tell my clients to pay off any high-interest debts first," says David Dondero, a certified financial planner in Alexandria, Va. "If you pay off a credit card with a 19 percent interest rate, it's like giving yourself a 19 percent return on your money. You can't go wrong by paying off a charge card."

A 401(k) plan could be one of the best investment vehicles a taxpayer can have. But all too often (as many fund plan managers will attest to) workers don't fund their plans sufficiently to earn all of their employers' match. The majority of this year's tax-law changes provided a boost to retirement savers. For example, starting in 2004, 401(k) participants can contribute up to $13,000 to their retirement nest eggs - an increase of $1,000 compared with 2003.

"If you simply put part of your refund into your 401(k), and have a match from an employer of 50 cents for each dollar you contribute, that's a terrific way to build a retirement nest egg," says Marc Freedman, a financial planner at TriCapital in North Bethesda, Md. "I'd say about 70 percent of my clients invest all or a good part of their tax refund."

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