I Don’t Want A Tax Refund, Neither Should You

     

                   

Happens every year, tax time arrives and many go “crazy”.  Some will have to pay out some more. That is a good move if you planned it this way and have the funds to cover the expense and incur in no penalties.  Others receive a nice chunk of change in the form of a tax refund. Most see it as a bonus, or a gift. Always nice to receive a refund, but it is just that: a refund; not more money.
 
I know, you may think that it is like finding a $20 bill on the sidewalk; who does not like that?  Wait...do not get all excited; nothing like that really. This was your money all along. You did not win the lottery. Make no mistake extra money it is not. I don’t understand why people look forward to them or even think of them in this manner.

The government is returning money that you had previously "overpaid".   Your money! The worst part of it is that it all amounts to an interest free loan you gave them.  Do you know of any lending institution that operates in this matter, handing out interest-free loans?  They would go bankrupt in no time.

Some plan on using the yearly “windfall” to pay for the family vacation.  You are better off opening up a vacation/savings club account instead. These work on a weekly or monthly deposit cycle and while interest rates are not very good, even 2% is way better than zero.  Some even offer a final deposit that matches your usual deposit. While I am not a fan of these as don’t even earn enough to keep up with inflation, but still much better than a refund.

An option would be to adjust your withholding to more accurately reflect your tax burden. Better to pay a hundred dollars in April than to receive a tax refund in May.  Perfectly legal to make this adjustment. Take a look at your previous tax returns and adjust accordingly. Say you paid $5,000 in taxes last year, that is approximately $415 a month.  Take the difference and instead do something worthwhile and productive.

That money burning a hole in your pocket?  Do not have the willpower? Fend off temptation and automate the extra funds into your 401k before you can get your hands on them. Take that money and put it to work for you.  These offer multiple advantages. Do not have an employer sponsored plan? Look for an IRA.

There are many options out there.  No matter how meager you may think your contributions may be, they really are not. Just look for a savings calculator, and you will see for yourself.

You will always hear comments like “there is always the potential risk of losing money”, or  “projections are hypothetical and not a guarantee of future results”. My personal favorite goes something like past performance does not indicate future gains, but image a race horse that ALWAYS finishes at the back of the pack, would you ever bet on him to win?  Conversely, the horse that always finishes up front will usually bring you some money. I know, not the same, but you can see the logic..

Whatever you do, don’t go out and buy that new pair of shoes you had your eye on. Trading a not so savvy financial move for an irresponsible one just dumb. With all those options available, loaning it to Uncle Sam is definitely not the best choice and it is not even close. Remember to pay yourself. You will be glad you did.

You did everything right; you maxed out on your contributions to your retirement accounts and you made the necessary adjustments to your withholding.  The savings account with a high interest rate was used. Still getting a refund? Now that is more like winning the lottery. There is your bonus for getting it all right.

The views here expressed are all my own and are not legal, professional or financial advice. Consult a professional before investing. Referral links may be found throughout. I only recommend products I believe in.  This site presents links to other sites but is not responsible for their content or privacy practices.