Check your withholding

Did you get a refund this year from the IRS? (Or, if you just filed last week after you read my blog post, are you expecting one?) Then you’ve effectively given good old Uncle Sam an interest-free loan of your hard-earned money. That’s a big old ouch, particularly in this economy.

Did you give Uncle Sam an interest free loan in 2010?  Check your withholding!Consider this: The average tax refund for this year is running around $3,000. If you had gotten that money in your paychecks instead, and invested it at a return of 8%:

  • In 10 years, you’d have $4,660
  • In 20 years, you’d have $7,238
  • And In 30 years, you’d have $11,243

But that’s just the tip of the iceberg. The idea is that rather than getting the $3,000 in one lump sum, you’d get $400 more in your paychecks every month. Do that and:

  • In 10 years, you’d have $64,857
  • In 20 years, you’d have $160,939
  • And In 30 years, you’d have $310,183

So this week, let’s fix it. Optimally, of course, you’d fill out your w-4 so that you don’t owe the IRS and the IRS doesn’t owe you. Particularly as the tax laws change from year to year, it’s close to impossible. I’d rather see you owe the IRS a few bucks than the other way around. At least that way, you can take money from your savings – where it’s earning interest for you – and write the check. This will likely involve changing the number of allowances you’ve chosen. By increasing the allowances, less will be taken out of your paycheck. (If you have the opposite problem, decreasing the allowances means more will be taken out of your paycheck.) I’d suggest working your way through the IRS’s withholding calculator then pick up the phone call your benefits department, make the right change!

Jean Chatzky

About Jean Chatzky

Jean Chatzky, the financial editor for NBC’s TODAY show, is an award-winning personal finance journalist, AARP’s personal finance ambassador, and a contributing editor for Fortune magazine. Jean is a best-selling author; her eighth and most recent book is Money Rules: The Simple Path to Lifelong Security. She believes knowing how to manage our money is one of the most important life skills for people at every age and has made it her mission to help simplify money matters, increasing financial literacy both now and for the future. In April 2013 Jean launched Jean Chatzky's Money School , a series of college-style, interactive online personal finance courses that give men and women across the country the opportunity to learn from and interact directly with her. Jean lives with her family in Westchester County, New York.
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One Response to Check your withholding

  1. Diana Dietsch says:

    Jean,

    This was great advice to all employees!!! I volunteer preparing tax returns for other people. Most people want a big tax return, and don’t realize that’s throwing money away for all the reasons you cited!

    Great job!

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