How could a big check from the government at the end of the year be a bad thing?

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Welcome to The Enjoy More 30s Family Finance

Podcast. The only podcast dedicated to making life more

enjoyable for young families by hitting on the financial topics

that tend to weigh on us stress us out and distract our focus

from simply enjoying life.

Hello and welcome to the third episode here of the Your Major

Money Misnomers Series. We are on the Enjoy More 30s Family

Finance Podcast here where we're trying to help provide young

families with information to better their lives and make it

more enjoyable. As always, if you like what you hear, please

make sure to subscribe or follow us on Apple podcasts or wherever

you listen. Clicking a star leaving a review really helps us

out helps to find other families out there that can we can

connect with and help provide this advice to as well. Last

week, we discussed packing for the right financial trip, and

the three basic financial questions to help you filter out

a lot of that advice that everybody's going to come across

and make sure it's relevant to you, and what you should be

working into your actual plan.

Today's episode is Tax Refunds Are Bad - Whaat!? -

right, that's the initial reaction - whaat!? - but we're

going to cover what you need to know when it comes to

understanding what a tax refund actually means, and what you can

do to change that amount you may be receiving, if I can convince

you that they aren't the best thing to be receiving large

amounts of.

Now it's funny how your views of things seem to change. As you

get older, you may have experienced this too. I'm

recording this episode right now in the heat of the New Jersey

summer, it's like 95 degrees outside or something like that

today. And if I was all the way back in high school, I would not

be inside. I would be at the beach with the sole goal of

trying to get tan. Getting some sun, getting some vitamin D,

obviously not all a bad thing. But I can tell you right now I

was 100% not doing it for that vitamin D. I wanted to just look

good. So as you may think back to your early days, maybe you

can relate with me in this. Now we've all seen kind of, you

know, those people that live at the beach, their skin is so dark

and wrinkled, that we really do clearly know excessive sun

exposure - not exactly good for us or our skin! I'll go as far

as to say intentionally exposing ourselves to radiation so our

bodies turn tan is a little bit odd if you really want to think

about it like that. Now we fast forward over to today. I don't

hide under a sombrero or anything like that. But I don't

also anymore go out of my way to try to just get as tan as

possible. On the contrary, in a somewhat ironic twist I guess

you could say, I instead spend my time chasing my kids around

trying to keep them lotioned up and have hats on their heads, so

they don't get too much sun.

So what you need to know about tax refunds is that, like the

summer sun, a little bit is fine, but you don't want to

overdo it by any means. Imagine I gave you the phrase "tax

refund", right, on a piece of paper. So imagine a piece of

paper the word tax refund is written on it. And I said you

have to either take this word or these two words and put them

into a column on the left that says good, or a column on the

right that says bad. Where do you pick yourself putting that

phrase tax refund? You're probably going to move it over

to that left hand column, right, into the good column. The thing

about tax refunds is that it's someone giving you your own

money back. Let's say someone slipped a $20 out of your wallet

and then gave it back to you. It wouldn't exactly be something to

you know, celebrate, right? You wouldn't feel that great about

it. With a tax refund, no one's slipping it out of your wallet

except for you. You're slipping it out of your own wallet and

giving it to the government. Let's say that you make $100,000

and you have your employer withhold 20% for taxes. So that

is $20,000. When your accountant does your taxes at the end of

the year, they are calculating what you actually should have

paid in taxes for that entire year compared to what you

actually paid. So let's say they calculate $18,000 is what you

should have actually paid. In this example, you actually paid

$20,000. So you receive a $2,000 refund. They gave you back that

$2,000 of your own money. People often say things such as like,

"I have a great accountant, they always get me a big refund".

Assuming you have an accountant though, who's following the

rules, they're really all just solving this math equation. And

they should all come to the same answer really. How much did you

pay in taxes compared to how much should you have paid in

taxes? That's really it.

Now you may be saying to yourself right now, you know,

Hey, Joe, what's the big deal? So I get a large refund. Why is

that a problem? The problem, from a financial standpoint at

least, lies in the fact that you're giving an interest free

loan to the government. You're saying "hey guys, here take

$10,000 of my money. No, no, don't worry, you don't have to

pay me anything, just give it back to me in like six to 12

months". So that $10,000 refund every year, that's money that

you could have had during the year invested in doing something

for you. Let's say on average, you had that money in your

paycheck during the year. And just for this example, say that

you were able to invest it and earn an extra 5% that you now

missed out on. So that might be say, $500 a year, you're missing

out on in that example, which adds up over time.

Taking it even further, some people that are tight from a

cash flow perspective. So if you are a little bit tight month in

and month out, but you get a big refund at the end of the year,

you're really just compounding that problem. Maybe there's

credit card debt that's building up. The less you're overpaying

the government during the year, the higher your paycheck then is

going to be as a result. So if you stop paying them an extra

$1,200 a year that you're just getting back at the end of the

year, your paycheck will now be $100 a month higher. So that can

really help out a lot of people. And if you're having to put

money on credit cards, and then you're just trying to pay them

off at the end of the year with the refund, you have 15 to 20%

probably in credit card interest that's building up, that doesn't

have to if you just lowered your refund, your paycheck would be

larger, and then maybe you wouldn't have to use those

credit cards.

The last part of this is that most people who get a big

refund, tend to wind up spending it - that's kind of the

behavioral element. Even though they're giving you your own

money back, you're like, "wow, free money!", not "wow, I got my

own money back!". So if you go back to Episode 2.1, Bonuses

Aren't Free Money, it's the same kind of thing. So if I can't

convince you to not get a big refund, I would at least

strongly encourage you to plan ahead of time for the refund you

get and make sure at least a portion of it is saved towards

yourself.

So the base adjustment you can do to fix this, so what can you

do, is pretty straightforward. Your employer, assuming you have

W2 income, so salary wage income, can adjust the

withholding you take out for taxes. If you speak to your

accountant, they should really be able to assist here so that

less is taken out of your paycheck for taxes, meaning what

you receive is going to be greater. Again, here's an

opportunity to save if if your paycheck increases by $200 a

month now let's say, that's an additional amount of money that

can be saved towards your goals - do not just let it disappear!

There's another option as well, that's a bit more interesting

that might fit some people out there. If you're currently

making Traditional 401(k) or IRA contributions, you are receiving

a tax deduction in this process, which is contributing to the

refund that's being received. So if you change these

contributions now to be into a Roth 401(k), or if eligible a

Roth IRA instead, now you will not receive a tax deduction for

those contributions. So let's say I'm putting $100 a month

into a 401(k) now or Traditional, and then I move it

over to a Roth, I'm no longer going to get a tax deduction for

that $100 a month. However, the trade off for this is that now

that $100 a month, that's going into the Roth is going to grow

tax free. So for some people, okay, instead of getting a

$10,000 refund, I'm getting a $7,000 refund, you know, that's

fine. I'm still going to now have additional tax free growth

because I have more money going to that Roth 401(k), or that

Roth IRA. So long term, this can very likely be more advantageous

for your overall situation. And the trade off is just getting a

little bit less of a refund.

So a quick recap of today is that number one, while some

refund is okay, too much is definitely not recommended in my

opinion. A refund is simply the government giving you your own

money back that you essentially loaned them at 0% interest. Two

is that a refund is simply an accountant calculating if you

overpaid, or underpaid during the year. They are just solving

this equation, they're not finding some hidden money if

they're all following the same IRS rules. Number three, is if

you do make some adjustments to your situation, make sure at

least a portion of that extra money is saved. So whether

that's, "okay, I'm getting less of a refund, so I have more in

my paycheck, that's more I could save", or you know, "Joe, you

can't convince me. I like my big refund, but I'll agree to at

least say 50% of it". And then lastly changing or looking to

potentially change some pre tax contributions, so money going to

a Roth IRA or excuse me money going into a 401(k) or a

Traditional IRA and moving those contributions over to a Roth to

maximize that long term tax free savings growth.

So that's everything I have for you today. Thanks as always for

tuning in. If you are able to implement what we cover

fantastic as always, that's wonderful. That's why I'm doing

this, less to worry about then before and you could just focus

more on enjoying life. If you are wanting help with these

things though or have questions you need help in clarifying,

check out that Ask Joe section on the show's website

www.enjoymore30s.com, that's enjoymore30s.com. Again I hope

you enjoyed this episode. If you specifically enjoyed this

episode, make sure to follow, subscribe, review us on Apple

podcasts or wherever you listen. There are literally millions of

young families out there I'm trying to reach and help just

like you.

The next episode that we have coming up for you is 'Schedule

Goals...Achieve Goals!". Crazy right, you have to schedule them

first to achieve them? We're going to cover why goal setting

may sound very cliche, it did to me for a long time, but it makes

all the difference in the world to achieving what would make you

the happiest. Until next week, thanks for joining me today, and

I very much look forward to connecting with you again soon.

The conversations on this show are

Joe's opinions and provided for general information purposes

only. They do not constitute accounting legal tax or other

professional advice for your specific situation. You should

always seek appropriate advice from a financial advisor,

accountant, lawyer or other professional before acting upon

any content or information found here first. Joe is affiliated

with New Horizons Wealth Management LLC, a branch office

of TFS Securities, Inc., and TFS Advisory Services, an SEC

registered investment advisor, member FINRA/SIPC.