Yes, I know, you probably already have plans for your tax refund. Maybe you’re already dreaming of that vacation or shopping spree. But what if I told you that you could both be responsible and save that money AND still splurge a little.

Ok, so here’s what I mean. Let’s say that you just got your W-2 in hand, and you’re on your way to the CPA’s office (or to your favorite online tax service.) Once all the data is entered in, you find out that you have a $5,500 tax refund headed your way. Now being the responsible person you are, you have already decided to save the majority of that refund (let’s say 2/3rds), but you want to spend the rest. So that’s roughly $1,800 you can blow on whatever your heart desires.

While that’s a pretty good strategy, here’s another idea: take the entire $5,500 and invest it in an IRA for 2014. (You have until April 15 to do so.) Assuming you qualify for the tax deduction (see below), you would increase your tax refund by about $1,800*.  So, in this scenario you can both save the full $5,500 and spend the $1,800… all thanks to Uncle Sam.

So how do you know if you’re eligible for a deductible IRA contribution?

  1. If you are part of a retirement plan at work (401k, 403b, etc.), then your income (adjusted gross income) must be below $96,000 if married filing joint, or $60,000 if single.
  2. If you are not covered by a retirement plan, but your spouse is, your AGI can be up to $181,000.

Now, let’s assume you start doing this at age 30, and continue until retirement at age 65, and you earn an 8% compounded annual return. Congratulations! You’re now nearly a millionaire, with about $950,000 saved up in that IRA. All while still “splurging” with that tax refund along the way.

*assumes 25% Federal and 6% State tax bracket