Financial Planning, Retirement

What To Do With Your Tax Refund This Year

3/8/18 8:00 AM

iStock-506483834.jpgMillions of Americans over the next few months will receive a tax refund from the government. Businesses are hopeful that this will provide a boost to consumer spending, but recent survey data suggests that many people are not in any rush to go on a shopping spree. Specifically, a poll conducted by the National Retail Federation (NRF) found that of the 65 percent of taxpayers that expect to receive a refund this year, only 22 percent will spend it on everyday expenses. That is the 2nd-lowest reading in the history of the NRF survey. Moreover, only 12 percent of refund-receivers plan to use the extra money for a vacation, just 10 percent intend to “splurge” on dining out or trips to a spa, and only 8 percent will purchase a television, furniture, or other big-ticket item.

Forty-nine percent of refund-receivers will instead add the extra funds to their savings, up from 48 percent last year and a new record high. Another 35 percent of respondents said that they will use their refund to pay down debt. That is encouraging since many older Americans have yet to eliminate all of their financial liabilities. The Federal Reserve Board’s Survey of Consumer Finances (SCF), for instance, found that more than three-quarters of families with a “near-elderly” (age 55 to 64) head of household held debt in 2016 (most recent data available). A lot of these liabilities can likely be attributed to mortgage debt, but 41 percent of near-elderly households were found to still owe money on one or more credit cards. On the bright side, the median credit card debt for these families has fallen sharply in recent years, ($4,168 in 2007 to $2,800 in 2016).

It is also important to remember that although it may feel nice to receive a large refund each year, financial experts consider it an inefficient use of one’s cash flow. For example, rather than giving the IRS an interest-free loan each year, Bankrate's Greg McBride recommends the following: “Adjust your paycheck withholding so that extra money lands in your hands every payday instead of Uncle Sam's. But the next step is even more important – use that extra money to increase your 401(k) contributions or have this direct deposited into your IRA. Instead of spending that $50 per biweekly pay period on morning lattes and having nothing to show for it, directing it into your retirement account makes your nest egg $7,600 bigger 30 years from now – and that’s the impact of just one year’s additional contributions. Keep that habit for the next 30 years, and with a 6 percent return, you’re looking at an extra $109,000 in your retirement account.”



Sources: NRF, FRBG, America Saves, Bankrate

Post author: Charles Couch