“Taxes are what we pay for civilized society.” — Oliver Wendell Holmes, Jr.

Tax RefundsAll the financial experts agree that if you are getting a refund then you have given your money to the government interest-free for a year and this is just plain wrong. But I disagree and follow Rich’s reasoning on this one.

Here’s why: most people lack the discipline to save. Of course, I save using an automatic deposit plan. But I consider my tax refund a windfall and for some reason when it comes in a lump sum, it seems so much more satisfying and usable. What’s the trade-off? A hundred bucks in lost interest… big deal in my opinion.

The government only gets it for a year and then it’s mine and it’s substantial and it gets invested at this time. The problem is that many people also lack the discipline to handle windfalls.

When a Windfall Lands is an article by Kathleen Day at the Washington Post and it offers some excellent advice. She writes, “Financial windfalls come in many forms: a year-end bonus, a tax refund or even a winning lottery ticket. But for many people, figuring out what to do when an unexpected sum of money falls in their lap — whether it’s a few hundred or a few hundred thousand dollars — is no easy call.”

“No matter how you use a windfall, planners say it should have a long-term benefit, such as getting out of debt or saving for retirement. Don’t blow it all on a new car or on items that could get you deeper in debt, like starting home renovations, which are notorious for costing more than anticipated.”

“Financial experts say that making the most of a windfall starts with knowing your financial personality: Do you hoard money or spend too freely, or in amounts beyond your income? An honest assessment is essential.”

“For many people, an unexpected chunk of money presents an opportunity to pay off credit card bills or other high-interest debt. Financial experts say that eliminating debt, particularly on credit cards, makes a lot of sense but must be paired with a change in spending habits.”

“If you can, planners recommend putting part of the lump sum into a savings account. Beckmann says this season, taxpayers expecting a refund have a new opportunity: The IRS for the first time will permit refunds to be split and automatically deposited into as many as three accounts. The smartest thing many people could do, she says, would be to open an IRA, a retirement savings account that offers tax advantages.”

The Financial Planning Association has other suggestions to make this money work for you in 8 Ways To Spend Your Tax Refund.

1. Reduce high-interest debt. Put that refund toward a credit card balance carrying a 14-percent interest rate and you’ve guaranteed yourself a 14-percent return on your money. And keep it paid down once you do. Lowering high-interest consumer debt is one of the best financial moves you can make.

2. Establish an emergency fund. Nearly 60 percent of the households in America with children under age 18 live paycheck to paycheck, according to a recent survey by MetLife. A pool of “rainy day” cash to meet emergencies would be welcome news for them.

3. Put it into a retirement plan. One in four eligible workers doesn’t participate in his or her employer’s 401(k) plan, according to several studies, and many more workers don’t fund their plan sufficiently to earn all of their employer’s match.

Say you receive an $800 tax refund. Put the money into your 401(k) and you will immediately earn another $400 if your employer matches 50 cents for each dollar you contribute. You’ll double your contribution if the employer kicks in a $1 match. That’s a lot of bang for your refund.

4. Other retirement accounts. No 401(k) plan or other employer-sponsored plan at work? There are always individual retirement accounts, and if you’ve maxed out contributions to those accounts for the year, consider tax-efficient mutual funds or maybe annuities. The self-employed have even more options, including solo 401(k)s, simplified employee pension plans and Keogh plans.

5. Put it toward college. Invest it in a college account for your children. The younger they are, the more years the refund will have to grow. Consider investing in the tax-free growth of a 529 college savings plan, a Coverdell education savings account or U.S. savings bonds.

6. Make an extra house payment or save for a down payment. Knocking off a chunk of your mortgage principal can save you thousands in interest over the long run. But accelerating mortgage payments isn’t always the best move, depending on your current mortgage rate and investment alternatives. You might want to consult a planner before making this use of your refund.

7. Buy additional or new insurance. Do you need additional disability coverage or perhaps long-term care insurance? While you’ll need to be able to keep the premiums up in subsequent years, the refund might at least get you started. [In household file in computer]

8. Have fun. OK, keep at least a little of it to have fun with or spend it on something that you “want” instead of “need.”

You can find a few other ideas here in an article that I wrote last year around this time.