Tax Refunds Are Bad for You

As usual at this time of the year I am once again hearing folks talk about what they are going to do with their tax refund. No matter how many tax and financial advisers suggest that it is not good planning to be getting a big tax refund, everyone seems to love it.

Why? Because of what they can buy with it. In these economic times I expect to hear people talk about saving or paying off bills with the refund, but instead they are talking about how quickly they can get their money back (even paying an extra $30 to do so) because of something they want to buy.

This points out one of the primary reasons people do not benefit from getting back a large refund. It sucks money out of their monthly budget where it could achieve something significant while at the same time it is just too tempting to spend it when it becomes available all at once.

Last year the average tax refund jumped to just over $3,000! Wow! That’s a lot of money, $250 a month to be precise. And there are numerous things that money could achieve if used productively.

If you are one of the “average” folks out there getting $3000 back this year, let me suggest an alternative. If you do not currently have a Roth IRA, or even if you do, think about redirecting that money to one now.

Reduce your withholding and start having that amount withheld from your check for automatic deposits to something like a Vangaard total market index fund Roth IRA. If you have 40 years you can expect to have well over a million dollars when you start to withdraw (normal averages anticipated).

Success with money depends on disciplined spending and investing. Getting a large tax refund is usually not a good idea and probably never a great one. Why not change your tax refund from a temporary pleasure into a long time asset for the future.