Please ensure Javascript is enabled for purposes of website accessibility

Why You Should Celebrate a Big Tax Refund, Not Regret It

By Dan Caplinger - Jan 12, 2019 at 6:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Some say it's dumb to let the IRS get an interest-free loan, but for many, it's the best move.

With the end of January looming, tax season is nearly here. While most taxpayers aren't exactly looking forward to having to prepare their tax returns, they'd still love to get big refunds from the IRS.

Yet inevitably at this time of year, you'll see plenty of commentary talking about how bad it is to get a big refund. These articles point out -- correctly -- that doing so means that you're missing out on money that you deserve to get throughout the year. Even so, there are several reasons why getting a substantial tax refund can be a smart move that gives you a lot more financial flexibility. Below, we'll look at three of them.

Refund check on top of 1040 tax form.

Image source: Getty Images.

1. It's the best way to deal with financial problems that larger paychecks probably wouldn't have prevented in the first place.

It's true that getting a big tax refund means that you've given up the chance to get slightly larger paychecks throughout the year. For instance, if you get a refund of $2,600, then you could instead have gotten a $100 bump in the paycheck you get every two weeks. Doing so would've given you $100 more to work with, potentially avoiding things like getting into debt.

Yet the problem that many people face is that they don't have the financial discipline to set that $100 aside -- or to avoid going into debt despite having the extra money. In effect, that unnecessarily large tax withholding from their paychecks acts as forced saving, and that increases the odds that the person will use their refund toward good financial ends once they've filed their tax returns. Conversely, it's easy to fritter away small amounts of extra money throughout the year -- leaving you with nothing in the end.

2. It gives you a big amount all at once.

There are many things in financial planning that work best when you have a relatively large amount of upfront cash at your disposal. Whether it's opening a brokerage account, making a down payment on a home mortgage, or buying a single share of an expensive stock, it can be a lot easier to take an amount like $2,600 all at once to put toward your goals than to find a use for $100 every two weeks.

In some cases, you can work around this problem. For instance, financial institutions often let people open accounts even if they don't have the required minimum balance, as long as they commit to making regular automatic deposits on a monthly or quarterly basis. That gives you access to the resources you need without having to have a big upfront cash payment. Yet if you want to choose an option that doesn't offer that flexibility, then having the big tax refund as your lump sum can be quite useful.

3. You need the visibility and encouragement of taking a big leap forward.

It's true that by adjusting your tax withholding, you can get access to small amounts of extra cash that you can use toward financial goals. Yet if you do it that way, you'll take only tiny steps forward, and although they'll add up to significant progress, it might not feel that way.

Many people would rather take big leaps all at once. A tax refund that goes toward paying down debt, building up savings, or investing in a stock with high potential for future gains can be a lot more satisfying than repeatedly setting aside $20, $50, or $100 toward a long-term goal that will take decades to achieve. Having a big tax refund lets you make all that progress at once.

Use tax refunds wisely

Critics of tax refunds are right from a mathematical standpoint, because it's better to get money earlier than later. Yet many find it easier to do the right thing with big tax refunds. If you're one of them, don't let naysayers force you to make a change that you'll regret. Just go on doing what you're doing, and enjoy the psychological boost you get from putting your tax refund to good use.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
311%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.