The Best Use of Spare Cash

When individual clients receive an income tax refund, a bonus, an inheritance or another windfall -- or even have some extra cash on hand after paying off their bills -- they have a number of options. The most prudent choices are investing, putting money in college savings or retirement accounts, or paying off debts. To help clients rate these alternatives, CPAs should consider three criteria: 1. after-tax rate of return, 2. risk, and 3. effect on asset diversification. This article offers a step-by-step approach to the options based on their after-tax rate of return, providing choices that offer tax advantages no matter how much money is involved: 1. Make the most of matching contributions. 2. Pay off high- and moderate-interest-rate debts. 3. Participate in a college savings plan if it provides state income tax savings. 4. Make other retirement investments. 5. Make personal investments and pay off low-interest-rate debts.