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Getting cash back from Uncle Sam? Tips to make your tax refund work harder for you

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Posted: Wednesday, March 12, 2014 10:00 pm | Updated: 1:45 am, Tue May 13, 2014.

(BPT) - Tax season is well underway, and many Americans expect to receive a refund, or have already gotten theirs. For many families, tax season is just one part of a broader financial picture for an overall budget.

Forty-five percent of Americans expect to receive a refund this year, according to a survey released by TD Ameritrade Holding Corporation (NYSE: AMTD). Of those receiving a refund, more than 60 percent plan to save or invest the money. The rest say they will use the refund to pay off debt, spend it on discretionary items or on necessities.

“Contributing lump sums like year-end bonuses or tax refunds is one way to bolster a retirement account," says Lule Demmissie, managing director of retirement guidance for TD Ameritrade, Inc., a broker dealer subsidiary of TD Ameritrade Holding Corporation. “Rather than spending their refund dollars, investors should consider ways to make that money work for them.”

Here are eight ways you could maximize tax refund dollars:

1. Invest in an IRA or Roth IRA – Not only is April 15 the deadline for filing 2013 taxes, it’s also the deadline for contributing money toward 2013 contributions in an IRA or Roth IRA. Roth IRAs give investors tax benefits like tax-free growth and tax-free withdrawals if all Internal Revenue Service requirements are met. Roth IRAs are based on the idea of paying the income tax up front, and allowing the growth and eventual withdrawal to be tax-free. Traditional IRAs allow investors to deduct contributions on income taxes now, and pay the taxes when qualified withdrawals are made in retirement. Income tax refunds received after April 15 can be applied to these accounts for the 2014 tax year, while contributions prior to April 15 can be for either 2013 or 2014, so it is important to specify.

2. Make catch-up contributions – Investors who are age 50 and older by the end of 2014 can make a catch-up contribution to their retirement accounts. The IRS has information on contribution amounts allowed.

3. Invest in the children – Families with children can open or add investments in a 529, Coverdell or custodial educational savings account. These accounts are designed for financing post-secondary education expenses. Some states provide tax benefits for 529 and Coverdell accounts.

4. Pay down debt – Reducing – or paying off entirely - the amount of high-interest-rate debt owed can result in significantly more money available over the long term.

5. Invest in the home – Making energy-efficient improvements not only can help reduce operations costs with savings on a monthly basis, but homeowners may also be able to sell the home at a higher price in the future.

6. Donate to a tax deductible charity – Be sure to keep a receipt and write off the donation for the 2014 tax season.

7. Adjust your W9 – A large refund means the federal government has been using your money (interest free) for up to a year, and is now paying you back. By adjusting your withholdings, you will have more money in your paycheck each week, and can look for ways to invest that money to potentially benefit you throughout the year.

8. Establish an emergency savings – No one knows when an emergency might result in the need for unexpected finances. If you don’t already have an emergency savings established, financial commentators and professionals typically recommend having six to nine month’s worth of expenses set aside for unforeseen expenses.

TD Ameritrade also has an online tax center with helpful tools and resources for investors still looking to file their taxes this year, or who may be interested in planning ahead for the 2014 tax year. Visit www.tdameritrade.com/education/taxes.page to find a calendar of important tax dates including a chart on when various tax forms are expected, information on costs basis and tax lots when it comes to buying and selling shares, a webinar on estate-planning basics, a downloadable 2014 tax guide and a minimum required distribution calculator to help determine the required minimum distributions for traditional IRAs and tax-deferred savings accounts.

With a little planning throughout the year, investors can take advantage of their tax refund dollars and make those dollars work harder.

TD Ameritrade, Inc., does not provide tax advice, and strongly encourages discussing your specific tax situation with your tax preparer.

Before investing in a 529 college savings plan, carefully consider the investment objectives, risks, charges and expenses involved. This and other important information regarding the plan is included in the issuer’s official statement which should be read carefully before investing.

You should be aware that many states may sponsor their own qualified tuition plans and may offer a state tax deduction or other benefits that are limited to residents who invest in that plan. Favorable tax treatment by your state of residence should be one of many appropriately weighted factors you should consider in making an investment decision.

Provided by: TD Ameritrade Holding Corporation, brokerage services provided by TD Ameritrade, Inc. member FINRA/SIPC /NFA.

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