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?







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