As painful as doing your taxes can be, millions of people look forward to this time of year. That's because after they gather all their forms together and figure out how to enter everything into their tax preparation software, they can count on getting a big reward: a good-sized tax refund check from the Internal Revenue Service.
Now as you'll see in more detail below, I'm not a big fan of getting huge refunds. If you adjust your withholding, you'll get more money throughout the year, letting it work that much harder for you. But some people prefer the psychological reward of getting a big lump in their bank account this time of year. If you're one of them, you'll want to make sure you put that money to work for your future.
Keeping the pace
So far this season, the IRS has sent plenty of big tax refunds back to taxpayers. The latest statistics show that 45 million taxpayers who've filed so far have gotten refunds. The average amount of those refunds has been $3,129, with those sent back to taxpayers via direct deposit averaging $3,257.
Ordinarily, those refunds would represent a lot of lost money for taxpayers. That's because by having your tax withholding set too high, you miss out on up to 16 months of interest on the money that your employer takes out of your check. If you could earn 6% on the money you saved, you could expect to earn $150 or more in interest by reducing your withholding and setting aside the boost in your paycheck.
Lately, though, short-term interest rates have been close to zero. That's bad news for savers, and it also means that you don't miss out on as much interest by letting your tax withholding build up into a big refund. But rates won't stay at zero forever, and it's easy to make adjustments to get more money sooner.
All it takes to get the benefits of your refund as much as a year sooner is to fill out a new Form W-4 and give it to your employer. You'll find all the details on what to do in this article, but the gist is by filling in the right numbers, your paychecks will get bigger, giving you the chance to save more throughout the year rather than with that big IRS check the following tax season.
What do to with what you've got
That may take care of the future, but what should you do with the refund you already have? For many of you, the answer is simple: Open a brokerage account.
In particular, discount brokers that offer commission-free exchange-traded funds are worth a close look. TD AMERITRADE
For instance, using TD AMERITRADE's offerings, it would be easy to put together a simple diversified portfolio. Vanguard Total Stock Market
Get started today
It's tempting to go blow that big refund check on a high-priced purchase. But for your long-term financial health, you're better off getting that money to work for your future -- as soon as possible. A brokerage account with access to commission-free ETFs could be the best way to get started right now.
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Be sure to tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.
