It’s the time of year when some people are seeing checks in the mail from the IRS, while others are sending checks in. Those of you who are seeing money coming back might feel like the lucky ones, but that may not be the case.
While it may feel like you’re being handed free money, there are downsides to that springtime pick-me-up. Check out these pros and cons of tax refunds:
The Pros of Tax Refunds
Extra Spending Money
Who doesn’t like a little extra cash? It’s a boost to your wallet as many of us are still recovering from holiday spending. It also means you don’t owe the government a lump sum of money at tax time, which can be an issue for people who weren’t planning for that payment. Whether you’re getting hundreds or thousands in your refund, there are some great ways to use that check to help bolster your financial plan. You might decide to treat yourself to a new television or a vacation, and you are certainly welcome to use your money however you please, but there are other ways you can use that money that might earn you a better return.
Consider adding extra contributions to your investment accounts. If you can afford to put that refund away for 20 years, you could end up doubling or tripling your money with a savvy investing strategy.
Paying Off Debt
A tax refund is also a great opportunity to pay off a chunk of credit card, student loan or other debt you may have. Cutting down on your debt means you’re likely to pay less in interest payments over time, therefore making your refund even more valuable.
The Cons of Tax Refunds
You’re Overpaying in Taxes Throughout the Year
Tax returns aren’t gifts. They’re refunds you get because the IRS withdrew too much from your paychecks or had withdrawals from other investment accounts. While it may seem like a great thing to have a tax return come each April, you pay for it the other 11 months of the year. When you get a refund from the government, it comes in the exact amount they owe you, without interest for holding it for the last 12 months. If you more accurately reported your withholdings and kept that money each month, you could then invest it and have been earning interest on those dollars the whole time.
Impulse Shopping vs. Saving
Many times, when we’re presented with a large check that we don’t necessarily need to pay the bills, it’s tempting to spend it immediately. If you are prone to this kind of behavior, it might be smart to utilize the direct deposit option to drop that money into a savings account where you may be less tempted to spend it.
With even just this small list of pros and cons, there are clearly many different options for what to do with a check from the IRS. If you’re wondering what to do with your tax refund, or how to correct your withholding, talk to your financial advisor about ways to put it to good use for your financial future.
This information is not intended to be a substitute for a specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
CFP®, Series 7 Securities Registration,1Series 66 Advisory Registration† Joe was drawn to the financial services industry by a strong desire to help individuals and organizations navigate the complexities of financial planning and investment management. He takes an educational approach to simplifying the financial lives of his clients and carefully guides them through any new life changes. For fun Joe enjoys rock climbing, yoga and playing chess. He lives...Read More