Where to invest your tax refund check

Your Money

March 14, 2004|By Andrew Leckey

Easy come, easy go. That's the attitude toward tax refunds from many Americans who spend the money before they receive it.

Because of recent tax cuts, the average check this year should be around $2,300, up more than $300 from last year.

That's not chump change, and you'd be wise to do something other than blow it on consumer electronics.

But first, consider revising your withholding at work so you will receive a smaller refund next tax year. You've been giving the government a free loan for the entire time it kept your money. Receiving a huge refund is nothing to crow about because it actually signifies poor planning.

When you get your refund this year, a smart move is to use it to pay off high-interest credit-card debt. Carrying such hefty costs is like having an anvil around your family's neck.

You could also put the refund toward an emergency fund if you don't already have one. Keeping the equivalent of three to six months' income set aside for a rainy day makes sense in a time of continued economic uncertainty and corporate layoffs.

Another possibility is to use those dollars to help raise your retirement accounts up to their limits. Putting money in sooner rather than later each year gets it working faster for you.

Going beyond those basics, here's what some experts advise that you do with that refund check from Uncle Sam:

Michael Furois, president of the Planning Associates, Chesterton, Ind.:

"If you pay estimated taxes, use the refund to apply to estimated taxes for the current year. Divide the refund by four and apply it to each quarter's estimated tax. You can credit it immediately back to the IRS when you file your return so that you never touch the money. You could also use the money to pay off Christmas purchases and travel expenses, or as forced savings to pay for your next vacation."

Harold Evensky, certified financial planner with Evensky Brown & Katz in Coral Gables, Fla.:

"This is real money and you must treat it that way. Hopefully, you have an investment plan in place. If you don't, sit down right now and make one. Use that money to rebalance your portfolio mix back to its original percentages. If you want 60 percent stocks and 40 percent bonds and the market has gone up, buy bonds and get back to your intended allocation."

Mark Balasa, co-president of Balasa Dinverno Foltz & Hoffman financial advisers in Schaumburg, Ill.:

"Use your refund money to update or create a will. Most people don't have a will. If you have children, you really must have one because having a child's guardians selected by a court is a bad situation. If all that's covered, invest. If you're starting out, some $1,000- minimum funds I like are Ariel (ARGFX), Artisan International (ARTIX), Gabelli Growth (GABGX) and Neuberger Berman Fasciano (NBFSX)."

David Bendix, CFP and CPA with Bendix Financial Group in Garden City, N.Y.:

"If you've covered all the bases in paying off credit-card debt and adjusting withholding, use your refund to start a systematic monthly investment program. Some growth-oriented stocks I like are Microsoft (MSFT), J.P. Morgan Chase (JPM) and Time Warner (TWX). I also like exchange-traded index funds such as Spiders that track the S&P 500 and Diamonds that track the Dow 30."

Ted Sadar, president of Sadar Financial in Akron, Ohio:

"Identify how and why you got the tax refund. You may have gotten it because of a deduction that isn't going to reappear in the future, which means you should not change your withholding. If you need forced savings for something such as a house, the refund is OK to use. I have clients getting back $6,500 and planning to use it as a home's down payment. They intentionally had more withheld last year in order to do this."

Sam Stovall, senior investment strategist with Standard & Poor's in New York:

"History is on the investor's side for a positive 2004, likely an 11 percent increase in the Standard & Poor's 500 and 13 percent for the Nasdaq stock market. Consumer, health care and technology sectors look good. Stock of Omnicom Group Inc. (OMC) in marketing and corporate communications, Hologic Inc. (HOLX) in diagnostic and medical imaging for women, Xilinx Corp. (XLNX) in software design tools, Nokia Corp. (NOK) in mobile communications are some of our choices."

Emily Hall, analyst with Morningstar Inc. in Chicago:

"The key thing is to see where the deficits are in your portfolio, and then use the refund money to fill those big holes. Some good starter funds are Vanguard Total Stock Market (VTSMX) and Dodge & Cox Balanced (DODBX). From there you might want to add a bond fund such as PIMCO Total Return (PTTAX) or Harbor Bond (HABDX), then a diversified foreign stock fund such as American Funds Europacific Growth (AEPGX)."

Andrew Leckey is a Tribune Media Services columnist.

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