Getting a Tax Refund Isn't in Your Best Interests

If you’re getting a tax refund this year, you’ve made an interest-free loan to the government. You’ve let Uncle Sam have your money free of charge for as long as a year.

Now, I don’t know about you, but I’m most definitely not in the loan business, and I’m especially not interested in loaning money to the government.

Yes, I know that many people use their tax refunds as some sort of enforced savings account, but there are far better ways you can do that which will actually earn you interest.

Here’s how you can do better than giving your money to Uncle Sam:

Say you’re getting a $1,000 refund. That’s free money, right? No! It ‘s your money and it has been in the hands of the government, not your hands for months now.

That’s $19.23 a week that could have been working for you.

If you’re getting a refund, I strongly advise you to visit your human resources rdepartment and ask for your withholding to be adjusted to reflect that amount.

With your $1,000 overpayment, that means you’d reduce your withholding by $19.23 a week, if you’re paid weekly. If you’re paid every two weeks, reduce your withholding by $38.46 per pay period and if you’re paid twice a month, reduce it by $41.67 a month.

But, you say, you don’t trust yourself to actually save that extra money in your paycheck. Don’t use Uncle Sam as a savings bank that pays no interest.

Instead set up an automatic deduction that puts that amount straight from your payroll deposit into a savings account or a brokerage account for a Roth IRA. I’ll be writing more about Roth IRAs next week, but, in a nutshell, these are excellent ways to save money and to see your money grow tax-free over the years and serving you well when you retire.

Right now, online banks are paying just under 2% on savings accounts, although that figure has been much higher in the past and will be again.

If that seems paltry, consider this: That $1,000 a year you’ve been loaning the government could turn into more than $41,000 if you’ve got 30 years until retirement at just 2% interest. I know you can do even better than that.

So, this April 15, celebrate the fact that you’ve given Uncle Sam exactly what he’s due and not a penny more!