Money Forward

This blog is about money and trying to keep my money from flying out the window.

Wednesday, November 01, 2006

Get a tax return or put it in your paycheck?

I was reading this article from Blueprint for Financial Prosperity and it made me think of something that's been on my mind for a while. If you can't ahndle your money, is taking 0 exemptions on your W-4 a better decision?

Since I took my new job I knew that I needed to get as much out of my paycheck as possible to make ends meet. Usually I do 0 exemptions on my W-4, a habit learned from my parents. Since I knew I had already paid about the amount of tax that was expected of me for this year, I took one exemption.

Thinking about it, and reading many articles about how you're better off getting your money in your paycheck than letting Uncle Sam get interest on it has put me somewhat at odds. I think this decision really has to deal with what type of person you are.

If you are:
Good with budgeting: If you can figure out how much your taxes are going to be, you can prepare correctly figure out how much per paycheck that is, and set that aside. You'll gain interest, you won't owe the government anything at tax time, and everyone's happy.

On the other extreme
Spend money as it comes in: This would be a time to maybe consider taking 0 exemptions. If it comes in your paycheck you'll probably spend it. If you are this type of person you probably already have savings problems, so getting that once a year tax refund might be good. It would be a good time to decide that you can save it, and put it away in a ROTH IRA or a CD or something where you won't touch it.

It's too bad that you can't ask the government to electronically deposit your refund into an IRA account. That would help boost your retirement, especially since the average refund is something like $2000.

The people that are between this would just have to decide what would be best. Making that extra interest on your money may be nice, but it will still be nothing if you don't save.

2 Comments:

  • At 10:29 AM, Anonymous Jeremy said…

    Actually, thanks to the pension reform act, starting in 2007 you can have your refund automatically deposited into an IRA.

    So this yields two ways to invest in your IRA regardless of whether you are a spender or a saver. If you are good at saving, reduce the amount of taxes coming out of your check and have bi-weekly or monthly contributions automatically made to your IRA. Or, if you have a spending problem, let the IRS hold onto your money via larger deductions, and come tax return time just automatically deposit into your IRA.

    Unfortunately, it still takes initiative for someone to set this up, but at least it is becoming easier to do.

     
  • At 7:35 PM, Blogger MoneyFwd said…

    that's good to know. I think it will help a lot of peole out, if people are told about it and the paperwork isn't a hassle.

     

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