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What to do with your tax refund

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Are you spending or saving your tax refund this year?

Feb. 20, 2019

It's early in the tax season, but so far, the average refund ($1,996) is nine percent less than last year, according to the IRS. That's coming as quite a surprise to many people.

Keep in mind: A smaller tax refund doesn't mean you paid more in taxes. The withholding tables were adjusted, so you already got a lot of that refund paid out in little increments each pay period.

Greg McBride, chief financial analyst at Bankrate.com, reminds us that withholding too much in order to get a big refund is not good financial planning.

"Ideally, you don't want to get a big refund because you've given an interest-free loan to the government," McBride said. "You'd either like to get a small refund or even pay a small amount and instead get your money throughout the year with each and every paycheck."

Some people want to get a sizeable refund check. Even though they could have that extra money to spend during the year by withholding less, they feel this forces them to save. And there may be some logic to that.

If you're getting a refund, put it to good use. Save it. Use it to start or increase your rainy-day savings fund. Pay down some bills. The cost of carrying a credit card balance is up and continues to go higher, so it's a smart move to pay down that costly debt.

One more option is to fund your retirement. Put some of that money into an Individual Retirement Account, either a traditional or Roth IRA. The longer that money has to make interest, the better off you'll be when you stop working.

"Use that windfall to pay down debt, to boost your savings or to make a retirement contribution," McBride said.

More Info: 9 Smart Ways to Spend Your Tax Refund

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