According to the IRS, the average refund for the 2023 tax year was around $3,000. While it may be nice when that extra $3,000 hits your bank account, it’s not as though it’s a gift. The government is simply repaying money that you loaned it throughout the year. Worse yet? The government repays you without interest.
Let’s imagine for a moment that you update your exemption amounts to decrease your tax withholdings. In other words, instead of loaning the government interest-free money, the funds come to you via your paychecks. If your 2023 return was around $3,000, that means you’d have an extra $250 per month. What can an extra $250 per month do for your retirement? Let’s find out.
Investing your tax refund
Let’s say you invest that $250 per month in an individual retirement account (IRA) with an average annual return of 7%. Depending on when you began investing, here’s how much you’d have at age 67.
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| Age | Years you invest $250 per month | Total accumulated at age 67 |
|---|---|---|
| 20 | 47 years | $987,673 |
| 25 | 42 years | $691,897 |
| 30 | 37 years | $481,012 |
| 35 | 32 years | $330,654 |
| 40 | 27 years | $223,451 |
| 45 | 22 years | $147,017 |
| 50 | 17 years | $92,521 |
| 55 | 12 years | $53,665 |
| 60 | 7 years | $25,962 |
| 65 | 2 years | $6,210 |
Data source: Author’s calculations
Less than $58 per week
The numbers are startling. Broken down into weekly increments, investing $3,000 yearly means investing less than $58 a week. Naturally, the younger you begin using the typical tax return to enrich yourself, the more money you’ll have when you hit retirement age. However, any extra money you have available to you in retirement can make life easier.
Let’s say you begin investing that $250 a month at age 50. By the time you’re 67, an additional $92,521 could be waiting for you in a brokerage account. While it’s not a fortune, it could be enough to make major repairs to your home or vehicle. It may be the money you use to cover unplanned medical expenses. Or, you may just allow it to continue to grow in a retirement account until required minimum distribution (RMD) regulations lead you to withdraw a portion.
Better safe than sorry
Scare tactics are, at best, ineffective. They make us anxious without offering actionable advice. For example, according to the May 2024 Social Security trustees report, Social Security reserves that help pay benefits will run out in 2035. Unless Congress can get along long enough to intervene, folks depending on Social Security would lose 17% of their full benefits. For a retiree already living paycheck to paycheck, that thought may be terrifying.
Rather than focus on what might happen, why not focus on what you can control? Whether you pay extra in taxes each year or not is up to you. If you routinely receive a refund — no matter the size — how you benefit from it is up to you.
As the late economist Roger Babson once said, “More people should learn to tell their dollars where to go instead of asking them where they went.”
We may not have control over the interest rate, our utility bills, or the cost of daycare, but we can determine the best use for our tax refunds.
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