Ah, tax season… For some this time of year is a dreaded part of life, while for others it’s something to look forward to. Getting that tax refund in the mail, knowing that you have some extra money on hand to do whatever you want with– it’s so exciting! But before you get your refund it would be a good idea to have a plan for what you’re going to do with that money. Whether you want to invest it, save it, use it to pay down debt or spend it and buy a new big screen TV, it’s wise to know what you want to do with it before it comes. Otherwise that money may just sit in your bank account to be eaten away with ice creams and coffee.

Here are some ideas to help you decide what to do with your 2009 Federal Income Tax refund:

Start an Emergency Fund

Financial advisers will tell you to create a fund with enough money to sustain you for a period of three to six months. This is especially wise in times like these, when it’s uncertain whether many of us will still have a job in the coming months.

Where you put this fund is up to you, though it would be better to have it in a place where it’s hard to “borrow” from. My wife and I have an online savings account with ING DIRECT. It’s a very practical account that links right to our bank account, but the best part is the interest payouts. There are other online banks that offer high interest as well. Here are a few to compare:

Bank of Internet – With the High Yield Savings account earn 2.06% APY (annual percentage yield). There is a minimum deposit of $100.00 to open this account but after that there are no account minimums or fees. *

HSBC Direct – Open an Online Savings Account with as little as $1.00 and earn 1.55% APY. There are no regular monthly or transaction fees with this account, though other charges may apply, such as non-sufficient funds, stop payment order, and return item fees. *

ING DIRECT – The Orange Savings Account offers 1.50% APY with no fees and no minimums. *

* Annual Percentage Yield (APY) is variable and subject to change without notice. Information from www.bankofinternet.com, www.hsbcdirect.com, and www.ingdirect.com is accurate as of 06/20/09.

Pay Down Debt

Another good way to use your refund is to pay down debt. If you have credit cards, a car payment, or a home loan, pay extra toward the one with the highest interest rate.

College Savings

If you would like to attend college in the future or if you have kids and want them to have the option of going to college, consider opening a 529 college investment plan. CollegeSavings.org is a site where you can find and compare plans that best fit your goals.

Retirement Savings

Use your tax refund to start or add to an Individual Retirement Account (IRA). A Roth IRA is of particular interest, as the earnings accumulate tax-free and remain tax-free even after distribution (when you withdraw funds).

Large Refunds Aren’t As Cool As They Seem

As fun as it is to get a huge lump sum from the government each year, just remember that they’re actually just paying you back for the interest-free loan you gave them throughout the previous year. Every paycheck the government takes out a little bit more then you owe them, then in the spring they pay it back without interest. If you’re receiving a large tax refund you should ask your employer for a new W-4 form so you can adjust the withholding allowance to receive that money in each paycheck. However, be careful not to allow too much money to be taken out of your paycheck– you do want a little bit of a tax refund; otherwise you’ll have to pay some at the end of the year plus fees.

A lot of people prefer to have a larger refund rather than getting that money in their paychecks where it would probably get spent on something or used for bills. If this is an issue, consider having that money direct-deposited from your bank account into the investment fund or high yield savings account of your choice. That way, after every payday, the money is gone from your account before you get your hands on it.