Tax Refund: 3 Reasons Why Receiving a $0 Return Could Be Beneficial to Your Finances
Written by
Gina Hagler
Edited by
Cory Dudak
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We often think of our tax refund as the silver lining to the money we lose to the IRS in withholdings each year. As the saying goes, taxes are inevitable, so getting money back can feel great. However, by requesting that your employer withhold adequate funds to cover your yearly estimated tax bill, you’ll have more money in your paycheck each month to capitalize and no money owed to the IRS at tax time. The result should be that your tax refund is a small amount – ideally zero.
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A zero-tax refund actually means you’re doing something right. Financial experts espouse that this is a good thing because you haven’t given the IRS the use of more money through withholdings each month than you’ll owe. This puts you in charge of your finances, making it possible for you to use these three reasons why receiving $0 could benefit your finances.
Investing
You can put the money from your ACH paycheck into a savings account, yielding 4% or 5%, maybe higher. If you’re so inclined, a solid alternative to a high-yield savings account is a money market account. Suppose you choose to contribute more to your 401(k). In that case, you take advantage of appreciation for a year’s worth of extra money – rather than letting the government hold it – and set yourself up for a more comfortable retirement.
Debt repayment
Paying down debt is a great way to avoid credit card interest charges or interest on other forms of debt like student loans, ultimately saving you money. As a bonus, you’ll also boost your credit rating.
Emergency fund
A few thousand dollars each year could also help you establish or bolster an emergency fund. An unfortunate injury brings with it hospital and medical bills – think of the relief you’d grant yourself through having built up a pocket supply just for the surprise expenses of life.
These are three pragmatic alternatives to getting a big tax return. The extra monthly money can help you with some of your expenses and debt, or reward you with long-term security in your retirement. If you’d like to calculate your withholdings, you can use this IRS estimator tool.
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