This is the time of the year when American families are anxiously waiting for their income tax refunds. According to IRS information (source: Washinton Post March 22, 2012) through March 10, the IRS has issued 59.2 million refund checks totaling $174.4 billion. That is approximately $3,000 tax refund per check.
If you are proud of the tax refund you received or anxiously waiting for your tax refund to be spent on your big plasma TV, I have some bad news for you. Although most people love getting tax refunds, a refund typically means you wasted your money. All you have done is give the government an interest-free loan. Therefore, Americans receiving a refund should be upset and not happy.
In simple terms, when a person receives a tax refund it means that he missed opportunities during the year to bring that cash home and make that cash produce for him. Instead he lent the money interest-free to the government, who happily returns now returns a portion to you. The problem is that the money was always yours and the government has had the benefit throughout the year of spending and investing your money and gives you no return in your investment. It is the worse savings or investment program you can have. Still, it is difficult to make people understand this concept, income tax refunds are bad for your personal finances.
$3,000 a year translate to $250 per month more in your family finances. If you take the $250 extra per month and invest in a Roth IRA that grows at 8% for a period of 10 years you will have a little over $46,000. Instead of giving you hard earned money to the government interest free, you take the extra $250 and place it in an Roth IRA for 20 years you will have approximately $148,000. The power of compounding. In my example I have not taken into consideration adjustments in your monthly deposits to adjust for inflation. I kept it at $250 per month. The good news is that the money you deposited and the growth is all yours. You won't have to give the IRS one penny of it. Special IRS rules applies to these accounts, therefore it is important to you consult with a tax professional to help you.
The above example is only one of many ways to you could put money work better for you. If you are still insisting in receiving a tax refund, I have a great offer for you. I will give you the same deal that the government offers. So to the readers of my blog, who still believe that receiving a refund is better, they can send me their money and I promise I will send іt back tο уου next year starting March 15, 2013, of course without interest. I know you are thinking that this is a silly proposition, but this is exactly what it is done every year.
