You gathered all that information your tax preparer requested. Income, expenses, and all those other tax forms required to complete your return.
You then wait with breathless anticipation to hear whether you owe more money or if you are getting that refund.
If you are getting a big refund, you may think that is great however, it really means you paid in too much during the year and have inadvertently given the IRS a tax free loan.
This is a perfect opportunity to talk with your tax person to help adjust your tax withholding at work so going forward, you have more money in your paycheck each pay period. If you are paying quarterly estimated taxes, these could be potentially reduced. (these adjustments to tax withholding can be tricky when one is self-employed and has varying income)
And since you will have more money in your paycheck it is a perfect time to sit down with your financial advisor and talk about whether you are on track for retirement. This extra money could be directed into your 401(k) and possibly into your own IRA or Roth IRA.
One other conversation to have with your financial planner is your level of debt or any upcoming large expenses.
Let's say you have accumulated $15,000 in credit card debt. It is important to determine if this is because you weren't receiving enough money in your paycheck to cover your expenses or something else.
That being said, paying off (or paying toward) a high interest debt such as a credit card is a way to get a guaranteed return of what your credit card interest rate is. 18% guaranteed is a pretty good return.
Putting this "windfall" into a large expense you had planned (like a new roof) could be a good use of this money as well versus getting a loan or incurring more credit card debt.
Over the years, many have told me they like getting that big refund. They feel it can be used for something fun like a vacation and if they got this money during the year in their paychecks, it would be blown on smaller things.
I remember years ago standing in line at Trader Joe's. I heard a conversation between two guys in their 20's go something like this…"Hey, I'm getting back $4,000 on my taxes this year. Cool, what are you going to buy?" Now I can't recall what the item was but I would have much rather have heard, "Well, I figured I'd put it in my Roth IRA for long term growth. In fact, if I can put $4,000 away each year for the next 30 years into a diversified portfolio of stocks and bonds, and can earn 7%, I'd have about $350,000*
This is where sitting down with a good Certified Financial Planner® practitioner makes a lot of sense.
Developing a savings and spending plan can help ensure a successful financial future.
Please feel free to reach out to me anytime for a conversation.
I'm here to help.
All the best.
Rick Fingerman, CFP®
*This is purely a hypothetical example and the 7% return is not guaranteed in any way. When investing in stocks or bonds, one could lose money.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.