Here are 3 ways to make the most of it

 

What’s even better than a windfall? Why, a windfall from the IRS, of course! You know, the organization that spends the rest of the year taking your hard-earned dollars.

 

I know a lot of people who look forward to—and even budget for—their annual tax refunds. It’s a rare event, having a few thousand dollars suddenly injected into their checking accounts, so they use it for fun, putting it towards their summer vacation, or splurging on their spring wardrobe.

 

For me, a big refund is no cause for celebration
Call me a party pooper, but anyone who looks forward to Tax Season gives a whole new meaning to the term “April Fool.” For me, every dollar I get back from Uncle Sam only serves to remind me that too much of my money was withheld over the past 12 months.

 

You may ask, “Why is that such a big deal?” Well, not only was I missing out on earning even the slightest bit of interest on that withheld money, I was also essentially giving the government an interest-free loan in return.

 

Suppose you get a $2400 refund; that’s $200 per month you could have been putting into a 403(b) over the past year instead (and the S&P 500 saw a 11.74% annual return on investment in 2016, to put things into perspective).

 

Don’t “lend” Uncle Sam any more than you need to
It’s almost impossible not to overpay. Even I got a $300 refund from the state in 2017, and I’m very diligent about paying the bare minimum in federal and state taxes during the year (with a little help from my friendly tax advisor). One thing to look at is the withholding status on your paycheck. It’s far better to underpay, and owe the IRS money come April, because then it’s you rather than the IRS who’s getting the “tax free loan.” Just beware that you may have to pay a penalty for underpayment if you don’t pay enough tax throughout the year. So make sure you withhold throughout the year at least what your tax liability was the year before. The IRS advises taxpayers to make estimated tax payments in four equal amounts to avoid a penalty.1

 

How to divvy up your tax refund 
Including your federal and state tax refund, you may enjoy a much more sizeable refund. It’s easy to think of ways you’d like to spend it— how you should spend it is another matter.

 

My rule of thumb for any windfall: Split it 3 ways!

  1. Pay down debt. If you don’t have any credit cards or outstanding loans hanging over you, congrats! Pat yourself on the back and move straight to number 2.
  2. Save (either for retirement or something shorter-term). Because I’m debt-free (not counting my mortgage, a “good” debt) I’ll devote $200 of my state tax refund to my IRA, my first contribution of the tax year. After being withheld for so long, I want my money to start growing at the earliest opportunity! If your emergency fund (3-6 months of income replacement, after taxes) is lacking, use your refund money to build it back up.
  3. Finally, splash out on some luxury purchases, guilt-free! My remaining $100 might go towards a nice dinner at my favorite restaurant. A reward for being so smart with the other $200.

 

Getting a tax refund this year? How will you spend (or invest) it?

1. https://www.irs.gov/taxtopics/tc306.html

 

 

138800

 

 

Teachers Insurance and Annuity Association of America has sponsored Ask the Expert posts for informational purposes only. Many of the experts are unaffiliated with Teachers Insurance and Annuity Association of America, College Retirement Equities Fund, and their affiliates and subsidiaries (collectively TIAA), and TIAA makes no representations regarding the accuracy or completeness of any information on the posts or otherwise made available by the experts. Statements of external featured experts are solely their own and are not endorsed or recommended by TIAA.


Responses from experts to questions posed by Woman2Woman community members are intentionally general in nature and are not intended to give personal, financial, or specific advice. Some strategies are complex, and more information is often needed to determine the personal needs of a community member. We strongly recommend that you consult with a financial advisor before taking any action based on an expert’s response or other information you obtain from the Woman2Woman: Financial Living site so that all of your personal circumstances can be taken into consideration. Participation in the site does not render the member a client of the expert or of TIAA.

 

This site is not designed to accept or respond to requests or complaints regarding specific TIAA accounts, products or services. If you wish to discuss an issue of that nature, please contact TIAA at 800-842-2252. TIAA is not responsible for any opinions provided by members of this site. TIAA is not responsible for the content or privacy policies of third-party sites to which you may link.


Any tax information provided is not intended to be used, and cannot be used, to avoid possible tax penalties. TIAA and its representatives do not offer tax or legal advice. You should consult an independent tax or legal advisor for advice based on your own particular circumstances.


The material and responses are for informational or educational purposes only and do not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. The material and responses do not take into account any specific objectives or circumstances of any particular individual, or suggest any specific course of action. Investment decisions should be made in consultation with an investor’s personal advisor based on the investor’s own objectives and circumstances.


Certain products and services may not be available to all entities or persons.


Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, are not deposits, are not insured by any federal government agency, are not a condition to any banking service or activity, and may lose value.


Experts may not have medical or scientific training. Any information related to physical or emotional health is not intended to be used in place of a consultation with a physician.


TIAA is not responsible for the statements of community members. We may link to posts made by community members only to direct you to topics that may be of interest to you. This does not mean that we agree with the opinions of these community members. Their statements are solely their own and are not endorsed or recommended by TIAA.


TIAA-CREF Individual & Institutional Services, LLC, Teachers Personal Investors Services, Inc., and Nuveen Securities, LLC, Members FINRA and SIPC, distribute securities products.


© 2017 and prior years, Teachers Insurance and Annuity Association of America-College Retirement Equities Fund, New York, NY 10017