What to do with your tax refund Published Jan. 18, 2007 By Paul "Vinnie" Venturella Contributor POPE AIR FORCE BASE, N.C. -- Editor's note: This is not indicative of any specific investment but is used for illustrative purposes. This information should not be considered tax advice. You should consult your tax advisor regarding your own tax situation. It's tax season and if you're like a lot of Americans you will receive an income tax refund. In essence if you receive a refund the government had an interest-free loan from you. Let's say you don't want to "loan" your money to the government, the most direct way to change your refund is get with your employer or finance office and change the exemptions you claim on your W-4. They should be able to determine a rough estimate of your tax liability based off of your estimated income and potential credits. The rule of thumb is the lower number of exemptions you claim the more will be taken out of your paycheck in taxes throughout the year and the higher your potential tax refund may be. If you do receive a tax refund, what are you going to do with it? Many people I know count on that refund to pay off bills. Others use it to buy a big ticket item or to go on a vacation. To some these are worthy causes, but I believe there is a better use of that money. Your budget should have enough discipline in it that you should not "need" your tax refund to pay off bills; usually credit cards or consumer loans. Too many times the refund is "counted" on to pay those bills. If you maintained a disciplined budget throughout the year then the tax refund could be used more positively. My advice to those receiving a tax refund is to invest it? Where should you invest your tax refund? It depends on your personal situation. A great place is in a tax-deferred vehicle like a Traditional or Roth IRA. There are others also. You and your spouse can each invest up to $4,000 in an IRA per year. The money grows tax-deferred...meaning you don't pay taxes on the earnings. For example if you invest $4,000 a year into an IRA and realize a hypothetical 8%*rate of return the account would be about $183,000 in 20 years. So if you receive a tax refund and your personal situation allows it; I would invest it, the results could be astounding.