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Use return well

Jack Sirad (Sacramento Bee) -- Federal and state income tax refund checks are in the mail, and the timing couldn't be better.

For millions of Americans, the money arrives at a time when they could put it to good use as Christmas bills are gathering dust, property taxes are coming due and the stock market is taking a big bite out of their bottom line.

Last year 75 percent to 80 percent of Americans who filed a tax return received a tax refund check, according to the IRS.

And we're not talking small numbers. In 2000, the average refund was $1,705, and this year it's averaging $1,800 per return.

For most of us, that's serious walking around money. The financial experts say it's enough money to help get your financial house in order.

If you are one of those individuals who have carefully planned their tax withholdings and expect some money back from the government this year, save it or invest it -- but don't blow it -- the American Savings Education Council says.

As the ASEC correctly points out, the temptation is to spend the money as soon as it arrives on a new electronic gadget or perhaps a spur-of-the-moment vacation.

The preferred course of action from those not in the retail or leisure business is to put the extra money toward savings, retirement planning or paying down a debt. If you do, you'll soon learn that with the help of compound interest, even a small amount of money can turn into a substantial nest egg over time.

Here are some options for the best ways to use that tax refund:

Pay Down Debt

Start with those credit cards earning 20 percent interest. Or make an extra payment or two on the $35,000 SUV that you're paying off over five years.

The advantage of paying down your debt, of course, is the elimination of finance charges. Bringing your credit cards current wipes out those wasteful charges, and you can use that extra $50 to $100 a month to pay your phone bill or to begin investing in a mutual fund.

Contribute To An IRA

If you qualify for a tax-deductible IRA, you have until April 16 to contribute and claim the contribution for your 2000 tax return. If the refund arrives after April 16, you can put the money into an IRA for 2001.

If you qualify, open a Roth IRA. Even though you don't get to deduct the contribution from your taxes, the Roth IRA provides an ideal tax-free way to save for retirement.

Remember, you don't have to have $2,000 for an IRA -- that's merely the maximum per person. So, if you have, say, $1,500, that works just fine.

Buy A U.S. Savings Bond

You can purchase them from many banks and even at work. Or you can go online by visiting www.savingsbonds.gov. The new I bonds start at $50 with a current return of 6.49 percent.

Invest In A Stock Or Mutual Fund Outside Your IRA

Many equity and bond funds allow you to invest as little as $500, and they're a great place to begin building your outside accounts.

And of course, with the stock market down significantly there are literally dozens of companies selling for less than $20 a share, which means you could buy 100 shares of a number of companies nationwide.

Set Up An Emergency Savings Account

Your tax refund can be the seed money that helps you build up enough cash to get by in an emergency. Financial planners recommend that you have three to six months of income in cash or cash equivalent, such as a money market fund.

IRS spokesman Bill Steiner offers a somewhat different strategy. His advice is for taxpayers to adjust their withholding by changing their W-4 statements so that they don't get such large refunds in the future.

"There's no reason to let the government keep your money all year long since no interest is paid on the money," he says.

He says that taxpayers can go to the Web site www.irs.gov and recompute their W-4. If you need help in adjusting your withholding, he says, contact the IRS at (800) 829-3676 and ask for Publication 919 "How do I adjust my withholding" or Publication 505 "Tax withholding and estimating tax payments."

But try as it might, the government has a tough sell in hoping that taxpayers will forgo the refund. Many taxpayers like to pay a little more taxes each week so they will have a sizable check the following year.

And if you feel that way, heed the American Savings Education Council's advice: Don't blow it.

(c) 2001 Sacramento Bee

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