Fidelity Bank

Your tax refund is on the way. How will you make the most of it?

With another tax season upon us, it’s an ideal time to evaluate financial plans and consider options for spending or investing refunds that may soon be on the way. Theresa Hinton, Vice President and Trust Officer at Fidelity Bank, shares four wise ways to put that refund to good use.

Option #1: Set up an IRA.

If you’re getting a refund and you don’t have a retirement plan at work, or you want to supplement your 401(K) plan, consider establishing an Individual Retirement Account (IRA). There are two types of IRAs: Traditional and Roth.

What’s the difference?

A Traditional IRA offers tax advantages to those who save. Traditional IRA contributions are deducted in the year they are deposited into the account. You contribute pre-tax dollars to the account, and you pay taxes on those funds once you begin withdrawing from the account at retirement age.

The exact opposite is true with a Roth IRA. With a Roth IRA, you pay taxes on your contributions to the account now. When you withdraw from the account at retirement age, the withdrawals will be tax free.

There are some income limitations and regulations surrounding these plans, but as a general rule, those are the distinguishing features of Traditional versus a Roth IRA.

Keep in mind:

• As a general rule, the Traditional and Roth IRA contribution limits are $5,500 for 2018 and $6,000 for 2019.
• There is a catch-up option: those age 50 or older may contribute a little bit more – $1,000 for 2018 and $1,000 for 2019.
• The deadline to make a 2018 contribution to an IRA is April 15, 2019, so there is still time to make a contribution if you haven’t done so already. If your refund is substantial enough, you can also make a contribution for 2019. The earlier you make the contribution, the better, because it allows more time for your contribution to appreciate in value.
• Every year, the thresholds change for what you can contribute to a Traditional or Roth IRA, and those rules can be driven by income. The regulations may vary, so it’s always wise to consult a tax professional when considering which type of IRA will best meet your financial needs.

Option #2: Set up a 529 Plan.

Parents receiving refunds this year may want to consider establishing a 529 Plan, or tuition savings plan, for their children. Contribute to this account now, which will grow tax-free, and designate funds for educational expenses for your children later. A recent change in the tax law allows you to use a 529 Plan not only for college tuition and expenses, but also for tuition and expenses of grade school and high school. There are some rules surrounding these plans, but a 529 is worth exploring for any parent who wants to plan for the educational expenses for their children.

Option #3: Pay down credit card debt.

If you are facing high consumer credit card debt, why not consider using part, or all, of your refund to pay down that debt and avoid high interest rates? This could be the perfect opportunity to start chipping away at those credit card balances.

Option #4: Set up a rainy day account.

If options 1 through 3 don’t apply to you, why not establish a rainy day savings account or add to your existing savings? Then, when life throws you a curve ball, or you have a special occasion coming up, you’ll be ready.  

Fidelity Bank has multiple local branch offices throughout Lackawanna and Luzerne counties, and our full-service Customer Care Center is at your service 7 days a week. Call or visit your local branch office today.

Daniel J. Santaniello, President and CEO, of Fidelity Bank, publishes Financially Fit with Fidelity, your guide to financial well-being, every Thursday. If you’re interested in a financial topic we haven’t yet covered or want to subscribe to our emails, please feel free to drop us a line at blog at fddbank dot com. We would love to hear from you.