Your tax refund is likely to be one of the biggest paydays you will get this year. There are many benefits to saving at least part of your refund, and sometimes you can get additional perks if you save in specific ways. Here are some great reasons to save your tax refund:
[Read: Retirement Tax Deadlines for 2012.]
Buy savings bonds on your tax return. Taxpayers can use up to $5,000 of their tax refund to buy paper Series I Savings Bonds simply by submitting IRS Form 8888 with your tax return. You can also directly deposit your refund into a Treasury Direct online account and use it to buy U.S. Treasury marketable securities and savings bonds. These paper or digital savings bonds can also be given as gifts to others.
Get a tax break with your IRA. Contributing part of your tax refund to an IRA could reduce your future, and perhaps even your current tax bill. Workers have until April 15, 2013 to make tax-deductible IRA contributions worth up to $5,000, or $6,000 for those age 50 and older, that count toward tax-year 2012. If you contribute to a traditional IRA between January 1 and April 15, you can elect to have the contribution applied to tax-year 2012 or tax-year 2013. An IRA deduction can be claimed on your 2012 tax return before the contribution is actually made as long as the money is in the account by April 15, 2013. “Assuming it is for a long-term saving goal, I would recommend contributing to an IRA if they are eligible,” says Joan Gagnon, a certified financial planner for Gagnon Wealth Management in Mansfield, Mass. “It they do a deductible IRA, they would receive a tax deduction on 2013’s tax return, which may generate another refund.”
Never pay taxes again with a Roth. You’ve already paid income tax on your tax refund, which makes it an ideal way to fund a Roth IRA. If you put a tax refund in a Roth IRA and leave the money there until after age 59 ½, you can often avoid paying income tax on any of the growth in the account.
[Read: Why You Should Open a Roth IRA.]
Win a prize. If you save part of your tax refund for the future you may become eligible to win a prize. The Doorways to Dreams Fund, a nonprofit organization aimed at improving the financial security of low and moderate income consumers, is giving away a $25,000 prize and forty $250 awards to tax filers age 18 and older who save at least $50 of their federal tax refund using IRS Form 8888 at SaveYourRefund.com. “Our goal with the save your refund sweepstakes is to bring attention to the tax-time savings opportunity and the tools available to facilitate it, and to help transform saving money from a mundane act of sacrifice into an exciting and fun event infused with possibility,” says Timothy Flacke, executive director of the Doorways to Dreams Fund. “People like the idea of winning prizes as a result of saving money, and winning—even small amounts—motivates people to save more successfully.”