Friday, December 8, 2006


Many people have extra money withheld as taxes as a form of savings and like getting that big tax refund when they file their return. Some people may do this as a sort of competition with their friends to see who can get the biggest refund.
Is this an economically sound approach? No. A better plan would be to deposit all the money in a savings account instead of lending it to the government interest free.

Along the same line of thought, here is another thought if you have some sort of deferrable income--for example, a required minimum distribution from your IRA. If you don't need the money for living expenses, you could wait until December to make the withdrawal. There are probably other examples but the IRA example is the first thing I came up with.

This cash flow deferral could accomplish two things. [1] You could draw interest or let the investments grow in value in your IRA longer and [2] you could reduce your payments of estimated income tax and make up the shortage by having a large percent of the December IRA withdrawal withheld as tax----the IRS considers withholding to be withheld equally throughout the year even if it is all withheld in December.

The first part of the above would increase the time the money drew interest. The second part would increase the amount of money available to draw interest for over eleven months.

Nevertheless, some people are still going to say, "I like getting that big refund so I want that big tax withholding." Also, some people would say that if they got their hands on the money earlier they would spend it all. Financial logic and human emotions may march to the sound of a different drummer.