Five Places to Invest Your Tax Refund

The average tax refund last year was $2,255, according to the Internal Revenue Service. If one of those checks is headed your way, you might be tempted to splurge on a tropical vacation, say, or on an end-of-the-season ski sale.

But with a little forethought, you can turn your refund into more money down the road.

Maybe a lot more.

Here are five ways to make the most of a refund.

1. Beef Up Your Retirement Savings

You can opt to have your refund deposited directly into a Roth or traditional IRA, as long as you haven't already made the maximum contribution for the year. (In 2008, you can contribute up to $5,000 to either type of IRA, or $6,000 if you're 50 or older. Remember that Roth IRA contributions phase out over certain income levels.)

Setting more money aside for retirement now will give your nest egg more time to generate compound growth. Your $2,255 contribution this year, for example, would grow to more than $11,000 in 20 years, assuming an 8% annual return.

Ask your IRA provider for its routing number, and then fill out the direct deposit lines on your tax form. Form 1040 filers, for example, will use line 74 to arrange for direct deposit.

2. Invest in Your Child's Future

College tuition is increasing at twice the rate of inflation. State-sponsored 529 college savings plans provide tax-advantaged savings for higher education expenses. Generally speaking, you can contribute after-tax money to a 529 plan.

Earnings and withdrawals are tax-free, as long as they are used for qualified education expenses. If you already have a 529 account, you can have your refund deposited directly into it, just as you would with an IRA.

3. Invest in Yourself

Further education in your field can really pay off -- whether it means upgrading your computer proficiency, honing your managerial finesse or finally getting that 100 ton captain's license. And when you're done with the class, update your resume accordingly.

You can use your new qualifications to make the case for a raise, or to find a new, better-paying job altogether. When you do your 2008 taxes next spring, remember to take any education-related tax breaks for which you're eligible.

4. Go Green at Home

Use the first $50 of your refund to change your incandescent light-bulbs to longer-lasting, more efficient compact fluorescent models. With the remainder, replace your old appliances with sleek, new, Energy Star-certified models. These changes can help you save as much as 20% on your utility bills.

Consider swapping out old windows and replacing insulation to save even more money. The changes might save money now and make money later: On average, energy efficient homes have a 6% higher resale value than standard homes.

5. Reassess Your Withholding

Getting a refund means you've given Uncle Sam an interest-free loan all year. If your tax situation will be largely the same in 2008, adjust your withholding so you break even at the end of the year. (The IRS offers a free calculator that can help you figure out exactly how to fill out your new W2.)

Reducing your withholding will increase your take-home pay; arrange for the amount of the increase to be deposited directly into a retirement account or 529 plan.

Investing those funds -- instead of using them to float the government a loan -- might make a big difference in your financial future.