Why It’s OK To Get A Tax Refund

Don’t get a tax refund.  That’s one of the first things most personal finance bloggers will tell you.  It’s giving the government an interest free loan.  That’s what they will say to justify the reasoning.  Keep the money yourself.  That’s the advice you’ll get.  Earn the interest on your own money.  That’s the benefit you’ll be told justifies it.

I’m here to tell you that you don’t need to worry about it.  If you get a refund, even a large one, it’s no big deal.  It really isn’t much of a problem at all.

The Justification For No Refund

Avoiding a tax refund was one of the first big tenets of personal finance I heard when I started reading money blogs.  That was over ten years ago.  I listed above the reasons, but it basically boils down to the idea that you shouldn’t give the government an interest free loan.  It’s money that you paid all year that you get back, right?  So, you should earn interest on it.  Interest is more money.  More money is great for personal finance. It all makes perfect sense.

It’s Stale Advice

Back in the day ten years ago, I was 100% for this.  However now, I really don’t think it’s that important.  Why?  Two

image from Morguefile courtesy of clarita

words: Interest rates.

Ten years ago, banks were flying high and paying out big interest on savings accounts.  Getting a yield of 5-6% was not uncommon.  Things like CDs and such could get you 7% or more.

That was pretty big money.

Now, interest rates are pretty low.  The biggest savings rate I earn is 1.75%, and that’s up big from a few years ago.  It was 1%.

Say you get a $3,000 refund.  Your interest, back in the heydey, could have been as high as $210.  Now, with 1.75%, you’d get $52.50.  *I know that it wouldn’t come to these exactly, but for simplicity purposes, I’m going with these.

When Something May Not Be Better Than Nothing

One thing I still hear is that, even with low rates, it’s still free money.  After all, while $52.50 isn’t as much as the $210 you could have earned, it’s still $52.50.  You should grab it, right?

My answer: Sure, but….what about temptation?

See, when you get extra money in your check, it’s easy to say that you won’t spend it.  But, what if you do?  In my example above, it would only take $52.50 of spending through the entire year before you come out behind.

Think about that.  $1 per week and you’d be behind.  One night out with dinner and drinks.  You get the point.

You Can’t Spend What You Don’t See

Getting $52.50 is certainly nothing to sneeze at.  But, if you take away the temptation to spend that throughout the year, most people won’t.  If you don’t see it, you’ll be less inclined to spend it.

Is taking away $52.50 a small price to pay to end up with a guaranteed $3,000?  I think that for many, it might be.

It’s All Discipline

Many will read this and be aghast.  They’ll say that of course they could save that money every week.  They’ll point out that any money left on the table is foolish.  They’re right.

But the fact is, those people are in the minority when it comes to saving.  Many people may not be disciplined enough to end up with that full $3,052.50 at the end of the year.

See, I’d rather a whole bunch of people end up with $3,000 than end up with $2,500 because they spent $10 per week throughout the year.  For many, that’s worth it.

Know Yourself And Trust Your Gut

If you end up getting a hefty tax refund, don’t beat yourself up.  If anything, understand that it’s still your money.  Interest alone won’t make you rich, so don’t sweat the lost opportunity.

If you think you can make the change, then do so. Keep the money.  Enjoy the interest.

But if you decide it’s not worth it, don’t sweat it.  If you think you might get tempted to spend a little bit, then let the government have their loan.  Take your refund next year and enjoy it.  I promise it’s not that big of a deal.

Readers, what do you think about getting a tax refund?  Am I violating the personal finance code of ethics, or do you see my point?

28 thoughts on “Why It’s OK To Get A Tax Refund”

  1. I agree with you. If one is super disciplined, then it’s money in his pocket to be saved . Most people aren’t, and for them it seems like a good way to save money, and it’s like a windfall. As you say, the lost interest isn’t very much. Actually one has to search to even find 1.75% interest.

  2. And there’s always the possibility that you’ll go too far the other direction and get a penalty for not paying enough estimated taxes! We did that once (actually twice, since the first time you’re forgiven). In the end it didn’t turn out to be much (we had paid estimated taxes, just not quite enough), but we’re rules followers and felt really guilty about it.

  3. Forget interest. If you get an average refund of $2,000 each year, that’s $167/month out of your monthly budget. That money could be used to pay off debt, build your emergency fund, or invest. Each of these likely of much more value to someone than bank interest rates.

  4. Thank you for articulating what I’ve been trying to say for so long. Getting a refund isn’t the end of the world. I’ve gotten to the point where I straight-up owe money every year. I want to set aside more money per paycheck to avoid writing a $1,000+ check every year, but hubs doesn’t want to do the “interest free loan” to the government. It really causes a hardship for us and it’s annoying. I wish people wouldn’t have such a dogma about this kind of stuff.

  5. I agree with you on this. We have gotten refunds most of our working careers. There were only a couple years when we actually had to pay (not much, < $100). We both work full-time, no kids, "own" our home (mortgage), usual medical expenses (eye, dental stuff). The refunds we get have always been relatively small, couple hundred bucks. I would much rather get some back then have to pay more in the end.

  6. I like my refund. If I really wanted to, I could probably set the money aside, but it’s risky like you said. And planning for a lump sum usually does better things for my long term finances. I have owed a total of two years in the past. That’s not nearly as much fun. So also, NicoleandMaggie’s point rings true with me.

  7. I’ve never been able to buy into the “never leave the gummint owing you a refund” theory. To me…yeah, okay, I KNOW it’s giving Uncle Sam a tax-free loan, but if it’s in my bank account it’s earning all of maybe almost 1%, or more likely it’s getting diddled away at Costco and waypoints.

    If, on the other hand, Uncle sends me a chunk of dough, it’s gonna go into SOME kind of savings. In the Dark Ages when I had a job and could live on cash flow, it would have been sent direct to Fidelity without passing go. Today it goes into the emergency fund…nay verily, it IS the emergency fund. You can’t live on Social Security, and you rely on RMDs to support you at your peril. Whatever comes back to me goes into the fund that will support me between the time I run out of money (probably along about July) and time for this year’s RMD (about in October).

    Let’s just hope they don’t find a way to take it away from us…

  8. The only way to guarantee you save the amount you’d otherwise receive from a tax return is set up automatic contributions to savings/retirement accounts. But when you put that $3k into a tax-deferred account, you get a reduction in your taxes, causing additional refund at your marginal tax rate! You might also get a Saver’s Tax Credit (I got $200 the last 2 years)!!
    I completely agree that today’s interest rates don’t make much of a difference. Besides, I work in government and am happy to give Uncle Sam a little float so my job is secure and the paychecks keep coming every month. 🙂

    • Very true, as long as you have the discipline and the system, then it can definitely work to your advantage to take the money throughout the year, but I don’t think the majority of people out there have both of those things in place.

  9. I prefer to err on the side of getting a (small) refund versus having to pay. It makes it easier on the budget. But I would much rather have my money now than at the end of the year.

  10. I’m waiting on my $1,600 refund and I’m SO HAPPY about it. That lump sum does a lot for me psychologically since it’s so much more than the amounts I’m regularly able to spare for each of my money goals.

    Besides, having more taken out of my paycheck forces me to be more frugal. I don’t always love it, but I’d much rather have that than run the risk I wouldn’t actually save the money that would be coming to me each paycheck instead!

  11. I like getting a refund. There is a psychological boost that comes with getting a small chunk of ‘extra’ money. I can put significant dent in a loan, set aside funds for a house improvement or family vacation, or replenish an emergency fund. We don’t spend our refunds frivolously; for someone who would be tempted to do so, a refund might not be the greatest idea.

    That being said, my refund was a little bigger than I wanted for 2017, so I’ll be adjusting my withholding as soon as the IRS updates their withholding calculator.

  12. That’s an interesting way to look at it. Personally, it’s not a big deal because I’m responsible with my money. A little refund check is nice.
    This year, we’ll owe a ton, though. I made more money with my blog and didn’t send in estimate tax.

  13. Logically it makes the most sense to reduce your withholding so you don’t get a tax refund at all, but since when are humans logical? While you don’t want to go overboard I don’t see a problem with getting a tax refund every year. It’s nice to do your taxes and realize you’ve got some extra cash to put towards a home improvement project or something else you’ve been putting off.

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