Now that the tax deadline has come and gone, state and federal governments are busy processing refunds to taxpayers who overpaid. If you’re expecting a refund you may be loaning money to the IRS that could be better used to boost your own retirement or emergency savings throughout the year.
If you are expecting a refund, determine why. Were you able to benefit from certain items in the economic stimulus package like the first time home buyer’s incentive or the energy tax credit? If one-time credits or deductions generated a refund, you may not want to change your current withholding status.
However, if you receive refunds on an annual basis, you may want to discuss your situation with a licensed tax specialist. He or she can help you adjust withholding to help your hard-earned money work for you throughout the year instead of loaning it to the IRS.
If it’s appropriate for you to adjust withholding to put more in your pocket now, consider redirecting that money to retirement savings for two reasons: 1) since you weren’t used to having it in your paycheck in the first place, you won’t miss it, and 2) it can potentially work even harder for you in a retirement plan like an IRA or 401(k) that may provide preferential tax treatment.
Tell us what you will do with your tax refund. Will you redirect it to retirement or emergency savings? Use it to pay down debt? Or use it to pay for home improvements, a vacation or other goals?
The information provided here is not tax advice. Consult a professional tax advisor for tax advice specific to your situation and circumstances.