Personal Finance, Taxes

Tax Refund As Savings – A Good Idea?

tax refund as savings?I read an interesting article about new legislation being proposed in California where your tax refund could be split and sent to two different accounts instead of just one. The reasoning is that by doing this, people will be more likely to send part of their tax refund to a retirement savings account instead of into their personal savings account where it will likely be spent:

Assembly Bill 2439 would allow California tax filers to split their state income tax refund into “money to save” and “money to spend.” Right now, taxpayers can only direct their refund to one account. By allowing us to split our refunds between two accounts, we could send $500 to an IRA and get the rest back in cash. This would promote saving before the temptation to spend sets in.

They give the following study example of why this will work:

Can we expect much from such a small change? Yes. A test of this simple concept in Tulsa, Okla., showed it can work. Community tax preparation programs offered a “refund splitting” option to 500 low-income tax filers. About one-third wanted to participate and people deposited $649 on average — 47 percent of their refunds — in savings accounts. Most importantly, three out of four of these filers had no prior savings.

I guess 33% participation is better than none, but I’m not sure giving people a choice is going to address the real issue. Lots of people have the choice to participate in their company’s 401k plan with matching funds which is an absolute no brainer, yet many still don’t.

While I agree that a choice versus no choice could be better, I also see the potential of abuse for the people it’s supposed to help the most. If these people don’t have savings accounts, are the tax preparers going to give the taxpayers good advice as to where to put those savings? My guess is they will suggest investments where they get a nice, fat commission rather than something that would benefit the person receiving the tax refund. Would you expect more from companies that promote rapid refunds to their customers?

3 thoughts on “Tax Refund As Savings – A Good Idea?

  1. Heh, how about some legislation to require people to put their tax refund money into some form of long-term investment. With some exceptions, I figure the people who don’t handle their finances well enough to avoid a massive refund probably need a little extra push to start saving their money for the future. But I guess that such a law wouldn’t quite work. Ah well. Maybe once I take over the Earth I can enact such a measur–dur, I mean, who said anything about taking over the Earth? 😉

  2. Actually, complain about the tax preparers all you want*, but H&R Block has a program exactly for that. They have an “Express IRA”, where they prepare the taxes as if they had put X amount into an IRA. Then that amount is routed into an IRA and the rest goes to the client.

    My understanding is that HRB has been *losing* money on these IRAs for a few years.

    Because there’s a legal wall between tax prep and brokerages, the money goes into a money market account. The client can then transfer it to whatever brokerage they want. Downside: The MM account makes almost nothing. Upside: The HRB IRA allows for tiny amounts of money to be put away – much less than most places’ minimums, letting people save as they can.

    And of course, HRB would love to send clients with said IRAs to the HRB brokerage firm. I’ve seen their presentations, but have otherwise not dealt with them. They seem to be a standard full-service brokerage, with normal fees. I’m sure some of them are evil and some are trying to get the best deal for their clients, just as you’d see at any brokerage.

    Also, a new program this year lets clients put a portion of their refund into a regular savings account, so if they need the money they can get it without penalty. I don’t know the details well enough yet to burble about it on a website, though.

    *Yup, I work seasonally at H&R Block. I give everyone all their options as far as filing, and frequently refer them to free e-filing. I still have tons clients who want their money *NOW!* who are willing to pay high fees to do so. Also, many of the people who are getting huge refunds are getting it because of the Earned Income Credit. The forms for that are a pain, and we charge accordingly. Many people can’t afford those fees without taking it out of the refund, and then they want the refund immediately. If the EIC paperwork were simpler, I’d be a lot more comfortable sending all my low-income clients to the IRS website and cheering them on. Otherwise I fear they’ll lose out on thousands of dollars.

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