Invest your tax refund or send it to me! It is all about choices. What are you going to do? I know some will pay down debt, add to savings or fund an IRA. If you are going to go out and spend it on dinner, clothes, electronic toys or something that will break, wear out or finished in an hour, you can always send it to me! What choice will you make?
Remember a tax refund is a return of your money that you had withheld from your paycheck. When you fill out your W4 for withholding it is not specific to your personal circumstances. It is a universal form for all taxpayers. If you earnings are similar each year, then you should adjust your withholding to match your tax liability. To play it safe, try to create a small refund (less than $50). That is equally true for state income tax as well. If you receive large refunds every year, either you like the forced savings or you do not mind that you are providing an interest free loan to the government.
Okay, you adjusted your withholding to reduce the size of the refund, what should you do with the money? Whether you are paid weekly/biweekly/semimonthly/monthly, you can invest your money in stocks, bonds, mutual funds, collectibles, antiques, commodities or real estate. You are looking toward the future and making choices. Someday, you want to retire or start a business. No matter what you want to do, you can do something with that money that will help you get there. What am I suggesting?
Personal finance experts talk about multiple income streams almost as often as asset allocation when it comes to investing. In retirement or your later years, you want multiple income streams because you want to make sure you have income. Retirement may mean a pension, stocks, Social Security, IRA, or Roth IRA. If you are already contributing to your 401K and other tax deferred investments, maybe you should think about a brokerage account. Why? Investments, outside a tax deferred account are taxed at capital gains rates!
Some may say that the capital gains tax may change in the future. I do not know, but I think the risk is worth it. I want an additional income stream that is taxed at a lower rate than ordinary income. Similar to an asset allocation, I want to have a diverse income stream to make sure that I do not run out of money in retirement. In retirement, I want the choice of withdrawing less from my IRA and use funds that have a lower tax rate. I invest in a Roth IRA, although I do not think I will be in a higher tax bracket in retirement.
I invest in a Roth IRA because I want the choice to either take the money tax free or I can leave in to my heirs. Choices are the basis for investing and you should give yourself as many choices as possible. Your investment in a brokerage account can be tax efficient, or for growth, it is your choice! Just think if you bought fifty shares of Apple when the share price was $60. It would be tax efficient because there are no dividends currently. Your $3,000 investment would be worth more than $20,000 today.
That is just one example! You could add to your savings to invest in rental properties and it too would be subject to capital gains tax. The more income streams you can accumulate, the better off you are. What should you do? You should max out your 401K, IRA, Roth IRA and start a brokerage account! If you do, you just added another income stream for your future. What do you think you should do? You can invest your tax refund or send it to me!
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Carnival of Retirement at Financial Success for Young Adults
You can invest your tax refund or send it to me!
I absolutely hate the idea of giving the government an interest free loan. I’m actually ok with owing a bit in April. Always want to pay taxes fully, but usually means I’m paying capital gains (which means I made money). I guess I can consider it an interest free loan from the gov’t to me!
The IRS doesn’t like it when you consistently owe them, so I like to have a small refund each year. I also like to have my money working for me!
It always cracks me up when people brag about how big their tax return is going to be. That just says “poor planning” to me. Couldn’t you have used that money throughout the year?
Unfortunately, most people do not have the discipline to do something with it all year. I suggest properly setting up your W-4 and set up a payroll deduction for the savings/retirement account.
Good suggestion KC. You can also request your returns as an iBond.
Spend or save – choice is yours!
If you minimize your refund, it won’t matter. Invest during the year according to your asset allocation and you will be fine.
Here is another choice ….. send your refund to me instead of Krantcents!
Hmm, should I delete your comment or not? Idecided to leave it, because I want to keep it fair!
Roth IRA is certainly the best as the law of compounding will work in your favor as time goes. It’s amazing how money multiplies over the time. And, I agree with you that, Uncle Sam ought not to hold your money free for the year.
It works both ways, if you owe you get to keep it too. I just suggest to minimize the the refund.
I used to think I could manage my witholding and get the right sized refund each year. Now with blogging, it’s impossible, I gave up. I hope to break even each year now. A nice refund offset by taxes owed on blogging. I could have worse problems!
You can just do your best to estimate and go from there.
Adjusting your withholding tax is a good tip, I do this and pay the additional money I get straight into an investment account. Not seeing a big juicy lump sum at tax time is a great way to avoid spending it the wrong way!
I agree, I would have use of the money during the year to support my investing.
Hopefully going forward will change our witholding philosophy. We personally liked getting the big refund checks. I actually just posted on this the other day on my new blog.
I find that using the money during the year is more advantageous and I just increase my payroll deduction to invest more of it.
What’s your account number? I’ll send my refund over right away 😉 Kidding! Great info about investing a tax refund!
Just wire your money to my Swiss account! 🙂 I guess I need Romney money to have one though.
Don’t worry about getting a refund or not now with interest rates so low. Previously, I was more focused on making sure that my payments were very close to the amount due.
I agree I like to keep it close too. I don’t like to pay or get a big refund.
I used to love getting big refund checks in the mail but my days of big refunds are behind me. I changed my withholding since then so my monthly paycheck is higher and my refunds are a lot smaller. I set aside more each month into my savings automatically so I don’t overspend which hasn’t been hard. So far I haven’t owed taxes when I filed my returns and I sure hope it stays that way.
I usually keep my withholding in line with what my tax liability is and increase my payroll deduction for investing. That way, I can not spend it.
We used to break even until a couple of years ago, but for the last two we always had some major changes, like we decided to up our retirement contributions way above the previous year’s contributions and then I started a business and had very erratic extra income. So even this year will get a refund. Next year probably is a refund year too as we are expecting some major changes this year.
But we do save the refund every single time. This year it will go to increasing our emergency fund.
Do you make estimated payments? You can adjust your payment for the fourth quarter. At least you can reduce the amount of the refund.
Ha, I absolutely love the title.
I agree with you people should be starting brokerage accounts. The process is so much better than 15 years ago, or at least it seems more transparent. There are a lot of fabulous free resources available to us. People certainly need to think more long term, or they are wasting money and risking a comfortable retirement, which is your point.
As individuals, we have a lot more control over our lives than we realize. Too many people are spectators rather participants in their lives. My post next Wednesday makes that point.
More than likely, this year we’ll have to cut a check…. again. On past refunds though, we’ve variously chosen to pay down debt or allocate to a future vacation.
I hate paying almost as much as getting a large refund. This business (blogging) will test my planning ability.
We work hard to save money throughout the year just to pay our taxes. As young people with a large amount of student loans it is tough to be hit with a large tax bill. Luckily when we were younger we did invest our tax return so we have money in savings for taxes… Still hurts though.
I always hate the idea of sending a big check! It is almost as bad as receiving a large refund.
The past few years we have been working to reduce our tax refund. After my second son was born early last year, however, I forgot to change the amount withheld from my paycheck so we will probably get a refund again this year.
I usually adjust my withholding when I complete last year’s taxes. Up to now, my annual income does not materially change year to year.