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Uncle Sam Pays Interest

MoneyWise | Jun 23, 2022

Show Notes

You know how Uncle Sam likes to charge you interest when your taxes are late? Well, that works both ways. It’s only fair … you pay when you’re late, and the IRS has to pay when they’re late getting your refund check out. We’ll talk about that today on MoneyWise.

  • Refunds this year are still averaging around $3,000, and as we’ve said many times before, that’s way too much. Your refund is really an interest free loan to the government, so you want to keep it as small as possible. Aim for zero.
  • Now, for a variety of reasons, the IRS is more behind than usual getting refund checks out this year. Several factors have led to delays in getting millions of refund checks out to taxpayers. But the good news is! If your check is more than 45 days late, the IRS will pay you interest on the total amount of your check. Right now, interest is accruing at 4%, but starting July 1st, the rate the government will pay you goes up to 5%, compounded daily.
  • But remember, your refund and any interest the IRS pays you, is of course, taxable, so you need to account for that. No free lunch there.
  • Now, when your refund check finally arrives, or if it has already and is still in your bank account, what will you do with it? Unfortunately, many folks who get big refund checks view it as “mad money” that’s outside the budget, so they can spend it frivolously. But a refund check presents an opportunity, and you should take advantage of it. Here are some ideas of how to do that.
  • EMERGENCY FUND: If you haven’t started an emergency fund, that’s the first thing to do with your refund check. Or add to it if you have one already. You want 3 to 6 months’ living expenses in liquid savings, and your tax refund can be a great jumpstart. Your emergency fund allows you to handle life’s unplanned but inevitable expenses without having to borrow.
  • By the way, the free MoneyWise App can help you get on a budget and track your expenses, so you can see how much discretionary income you have for saving.
  • PAY DOWN DEBT: It’s the best investment you can make with your refund. It gives you a guaranteed return on your money, equal to the interest rate you’re paying to the credit card company,which is probably a lot. If the refund won’t cover all of your debt, that’s okay. Pay down as much as you can.
  • START SAVING FOR RETIREMENT: Think of it as finally getting your money to work or you instead of you always having to work for your money.
  • Let’s say that back in 2012, you put your 3-thousand dollar refund into a qualified retirement account in an S&P 500 Index fund. Today that $3,000 would be almost $12,000.
  • That’s the power of compound earnings. Granted, the stock market did incredibly well over the last 10 years. But historically there’s no better way to create wealth than by investing broadly in the market over a long period of time.
  • FIX UP YOUR HOUSE: If you’ve been putting off a necessary home repair, it’s okay to use refund money for that. Also, home improvements might help increase the value of the property.
  • Keep in mind that not all improvements are worth the money, so you have to do some research. Realtors are always a good source of information.
  • INVEST IN YOURSELF: Use your refund to get more training, take a job-related course, attend a conference or join a professional organization. Those things can pay off down the road with promotions or at least increased job security.
  • BE GENEROUS: Does this extra cash enable you to be more generous? Take the opportunity to give something more to your church or to further God’s Kingdom in other ways.
  • By the way, if you’re married, sometimes when money comes into a household, both spouses might not agree on how to use it. It’s important to reach agreement. Sit down and talk about it, and really listen to your spouse’s point of view.
  • Then, kneel down together and pray about it together. As our friend Howard Dayton likes to say, it’s impossible to argue with someone when you’re praying together. More than likely, you’ll be able to resolve your differences and reach agreement.

On this program, Rob also answers listener questions:

  • When does it make sense to invest in a Roth or standard IRA?
  • When distributing an inheritance from a deceased relative, do you need to gather the social security numbers of those who will receive money?
  • Does it make sense to buy a home now or continue to pay rising rent?

Remember, you can call in to ask your questions most days at (800) 525-7000 or email them to Questions@MoneyWise.org. Also, visit our website at MoneyWise.org where you can connect with a MoneyWise Coach, join the MoneyWise Community, and even download the free MoneyWise app.

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