Federal income tax refunds present two problems for the retirement saver. That’s right, problems. Let me explain, in just a few words.
Why would you want to do that?
If you want to lend your money out at no interest, find someone more deserving. Better yet, why not invest that money into your retirement nest egg?
I never receive a tax refund. I always owe more taxes to the government. My issue is walking that fine line between sending a check on April 15 and being hit with an under-withholding penalty. That’s where my year-end tax planning occurs.
Some folks argue that over-withholding is really a forced savings strategy. According to this “logic”, because they never see the money, they won’t spend it.
Sorry, that is unpersuasive.
It would make much more sense (and make you more money) to direct deposit that extra withholding into a high-yield savings account. Make it an account that does not come with an ATM card or check-writing privileges and you are good to go. Let the bank hold it for you – and pay you interest – instead of letting the government use it for free.
The second problem associated with tax refunds is that people tend to treat them – and spend them – as “found money.” They consciously or sub-consciously pretend that the government sent them an end-of-year bonus. So they take that “bonus” and treat themselves to a vacation or some frivolous purchase.
It is not a bonus, folks. It was your money all along. You just were not careful about who got to use your money all year. Some folks make it worse by accepting a “refund anticipation loan” from an overpriced tax preparation service.
File online yourself. Take that refund and immediately invest it for your retirement. If you have consumer debt, use the refund to pay that debt down.
One good retirement investment option is to direct that your refund be used to purchase I-Bonds.
The final step is to contact your payroll or HR department and adjust your 2010 withholding so that you do not receive a refund next year. Before you go, use this IRS withholding calculator to determine what adjustments you should make.
Plan to succeed and you will.