This time of year some of you are seeing checks in the mail from the IRS, while others are sending checks in. Those of you who are seeing money coming back might feel like the lucky ones, but that may not be the case.
While it may feel like you're being handed free money, there are downsides to that springtime pick me up. Here's our list of the pros and cons of tax returns.
The Good
Who doesn't like a little extra cash? It's a boost to your wallet as many of us are still recovering from holiday spending. It also means you don't owe the government a lump sum of money at tax time, which can be an issue for people who weren't planning for that payment.
Whether you're getting hundreds or thousands in your refund, there are some great ways to use that check to help bolster your financial plan. You might decide to treat yourself to a new television or a vacation, and you are certainly welcome to use your money however you please, but we have a couple of ideas that might earn you a better return.
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Consider adding extra contributions to your investment accounts. If you can afford to put that refund away for say 20 years, you could end up doubling or tripling your money with a savvy investing strategy.
If you are in debt, it's also a great opportunity to pay off a chunk of credit card, student loan or other debts you may have. Cutting down on your debt means you're likely to pay less in interest payments, therefore making your refund even more valuable.
The Bad
Tax returns aren't gifts. They're refunds you get because the IRS withdrew too much from your paychecks or had withdrawals from other investment accounts. So if you're getting a $2,000 tax return, it means that you were forking over an extra $166 each month.
So while it may seem like a great thing to have a tax return come each April, you pay for it the other 11 months of the year. When you get a refund from the government, it comes in the exact amount they owe you, without interest for holding it for the last 12 months. If you more accurately reported your withholdings and kept that money each month, you could then invest it and have been earning interest on those dollars the whole time.
The other negative is that many times, when we're presented with a large check that we don't necessarily need to pay the bills, it's tempting to spend it immediately. If you are prone to this kind of an issue, it might be smart to utilize the direct deposit option to drop that money into a savings account where you may be less tempted to spend it.
If you're wondering what to do with your tax refund, or how to correct your withholding, talk to your financial advisor about ways to put it to good use for your financial future.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com . Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.
