Income Tax Refund – Spend or Save?

By Arlene Rheinfelder, Prescott Tax & Paralegal

Certified Legal Document Preparer and Enrolled Agent

In 2015 the IRS issued an estimated $125 BILLION dollars in income tax refunds. The average refund was $3,120 in 2015.  Everywhere I look, I see sales people clamoring to get a piece of your income tax refund.  They will all hate me in just a moment.

I want to paint a picture of something incredibly fabulous that you could do with your refund.  If you take $2500 from your refund, and put it in a CD at Capital One for 5 years, you could earn a whopping 2.3% interest.  At the end of 5 years, you would have $2,801.  If you did that with your refund each year for 5 years, at the end of that 5 years you would have $16,190.

Or you could be really daring, and invest in a mutual fund that gets an 8% annualized return. If you only invested the initial $2500, you would have $3,673 at the end of 5 years---almost 1 and ½ times your initial investment.  If you took $2500 from your refund each year for 5 years and invested it in a mutual fund with an 8% return, you would have $19,513 at the end of 5 years!  Have I captured your “interest” yet?

Of course, there is some risk with investing in a mutual fund because the stock market may go up or down.  Unlike a CD, the 8% return on a mutual fund is not guaranteed.  Another option is to use an indexed annuity with no downside risk. This type of annuity goes up when the market index goes up and you get a fixed percentage of the market gain. In exchange for giving up a piece of the upside gain, your investment will not go down if the market goes down. It is a wise idea to consult with a good financial planner when making investment decisions.  We are happy to provide you with a recommendation for a financial planner.

Another benefit to saving or investing your refund may be that you can get a tax credit if your income is low enough, you are not covered by an employer retirement plan, and you contribute the refund to an IRA. 

This year instead of spending your refund, think about consulting with a financial planner and making an investment in your future. Sure, spend 10% of that refund if you must, but think about what you can accomplish by saving that money.

If you continued to invest $2500 annually at 8% annual return for 20 years, you would have $135,210 from your investment of $50,000.  If you were able to get 15% annually, you would have a whopping $335,442! On the other hand, if you spend your entire income tax refund, quite simply, it is gone.

Have a question? Email it to: arlene@PrescottTax.com

Prescott Tax & Paralegal, the office of Arlene Rheinfelder, AZCLDP is located at 141 S. McCormick, Suite 206, Prescott, AZ 86303.  Contact us at 928-778-3313 or visit online at http://www.PrescottTax.com.

This article is for informational purposes and not intended as legal advice.  If you need legal advice, you should contact an attorney. 

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