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tax refund

Q&A: What to do with a big tax refund?

April 27, 2014 By Liz Weston

Dear Liz: I got a big tax refund this year and am trying to figure out what to do with the money. Right now I have school loans with a 4% interest rate that I do not need to make a payment on until 2024 with my current payment plan, but the amount I owe is pretty hefty and I know it’s going to compound more over time. I also have a very low-interest car loan (1.9%) that will be paid off in 31/2 years. I also could put that money in the market in hopes that it will grow. I should add I am 27 years old. Any advice?

Answer: Yes: Please review the terms of your student loans, because it’s likely you’ve misunderstood your obligation.

Federal education loans typically don’t allow you to go 10 years without payment, said financial expert Mark Kantrowitz, publisher of Edvisors Network.

“With federal education loans, the economic hardship deferment has a three-year limit and most forbearances have a three-year limit, with one or two having a five-year limit,” Kantrowitz said.

“One could potentially consolidate the loans after getting a deferment and forbearances to reset the clock and thereby get a new set of deferments and forbearances on a new loan. But most of the forbearances aren’t mandatory, so one can’t count on stacking deferments and forbearances to get a 10-year suspension of the repayment obligation.”

Another possibility is that you’ve signed up for an income-based repayment plan that has reduced your payment to zero, but your eligibility is determined year by year. “2024 is a very specific date, so it seems unlikely that this is [income-based repayment],” Kantrowitz said.

“The most likely scenario is this borrower is misunderstanding the terms of his loan,” Kantrowitz said. “The next most likely scenario is that this borrower is not referring to a qualified education loan, but to a particular personal loan that he was able to obtain that few other borrowers would be able to obtain.”

Whatever the case may be, one of the best uses for a windfall is to boost your retirement savings. Even if you don’t have a workplace plan, you could set up an IRA or a Roth IRA as long as you have earned income.

Once you’re on track for retirement, your next goal would be to build your emergency fund, since you don’t have any high-rate debt. Once those goals are met, you can start paying down lower-rate debt (such as your student loans).

Filed Under: Investing, Q&A, Student Loans, Taxes Tagged With: Investing, q&a, Student Loans, tax refund

Tuesday’s need-to-know money news

March 11, 2014 By Liz Weston

Zemanta Related Posts ThumbnailToday’s top story: Turning this year’s tax refund into next year’s savings. Also in the news: Growing your 401(k) at any age, four financial potholes you should swerve around, and what cyberscams you need to worry about in 2014.

How to Turn This Year’s Tax Refund Into Bigger Tax Savings Next Year
Making your tax refund work for the future.

How to grow your 401(k) at any age
Tips that work for both Boomers and Generation X.

The Four Financial Potholes that can deflate your dreams
You’ll need to swerve around them.

The CyberScams You Need to Worry About in 2014
It’s not just your home computer.

Savings Clubs: Not Just for Christmas Anymore
Clubs exist for virtually anything that requires savings.

Filed Under: Liz's Blog Tagged With: 401(k), christmas clubs, cyberscams, Identity Theft, Retirement, savings clubs, tax refund, tax savings

Watch out for tax refund theft

July 9, 2012 By Liz Weston

Dear Liz: My cousin had his house broken into a little over a year ago. A lot of things were taken, but insurance replaced most of what he thought was missing. This year after he filed his return he was contacted by the IRS, which told him that a return using his information had already been filed and the refund check cashed. The IRS is investigating the situation now, but I really worry about what is going to happen to his Social Security in the future if someone else is using his numbers or those of his children. Do you have any information on what steps he should take?

Answer: Theft of tax refunds is a growing problem. In fact, tax identity theft is the No. 1 fraud on the IRS’ list of Dirty Dozen Tax Scams of 2012.

The fraud is often perpetrated by organized criminal gangs that con, steal or buy people’s personal information to create bogus returns. Some people fall right into the bad guys’ hands by responding to emails that purport to be from the IRS. (The IRS doesn’t email people to request personal or financial information.)

If the problem isn’t resolved within a few months, your cousin should contact the agency’s Identity Protection Specialized Unit at (800) 908-4490.

Since the criminals already have his Social Security number and other important financial information, he also should put security freezes on his credit reports at all three bureaus. Links to the bureaus and other information for identity theft victims can be found on the IRS’ site at http://www.irs.gov.

Filed Under: Identity Theft, Q&A, Taxes Tagged With: idenitiy theft, IRS, tax refund, tax returns

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