Your tax refund: Bigger isn’t always better

Posted by Shelly Eweka.
Remember how much of a downer it was, on your tenth birthday, when some distant relative gave you a gorgeous summer dress—only it was one size too small. How much better it would have fit you the previous summer—when you were still that size! For me, getting a tax refund is kind of like that. I don’t want a windfall from the IRS in April or May when I could’ve made much better use of that money the year before.
It’s never too late for a “paycheck checkup”
Many people see a tax refund as a kind of gift from the government. What it really means is that they overpaid the IRS during the previous tax year, in effect giving Uncle Sam a kind of interest-free loan for many months. No small-fry loan, either: The average tax refund is more than $2,800.1 The reason so many of us unwittingly “loan” the IRS money is that our default federal withholding status—the amount automatically withheld from our paycheck—is too high. Yet you can fix that by actively adjusting your withholding status at any time, simply by giving your employer a new Form W-4. You want the IRS to withhold too little than too much during the year. To find out if you’re having the right amount withheld, you can do a quick “paycheck checkup” using this IRS withholding calculator. Have your recent pay stubs and last year’s income tax return at hand.
Letting the feds withhold no more than they should will put extra money in your paycheck, month by month—money you can use to pay down debt throughout the year, or invest in your retirement fund or brokerage account.
Tailor your withholding status to fit your financial stats
That being said, you may still prefer to pay the opportunity cost of letting the IRS withhold too much, in order to avoid a potentially unpredictable tax bill in April—especially this year with the new tax reform bearing unknown fruits.
You don’t want to go in the opposite direction, where you owe the IRS more than you can afford right away, because that comes with penalties. Working with a tax planner well before Tax Day can help put you in a sweet spot where your IRS balance sheet stays as close to zero as possible. This tax year I went against the grain and withheld more than normal, because I’m not sure how the new tax laws will impact my taxable income, especially with the new cap on state, local and property taxes.
What to do with any refund you do get
If you are expecting a refund this year, I’ve always taken a repay/save/splurge approach: Use a full third of your refund to pay down debt, put a third into your emergency fund or IRA, and spend the rest on something nice for yourself. I still stand by my divvy-into-thirds doctrine with maybe one update: If you have a lot of credit card debt, use your entire refund to help pay it off. Interest rates have been at record highs, and your IRS windfall could deal a necessary pinprick to your ballooning debt.
Bottom line: As with gorgeous summer dresses, there’s no one-size-fits-all opton, except to work with a tax professional to find the most efficient withholding strategy for you.
1 “IRS withholding Calculator,”,, accessed December 2018
Teachers Insurance and Annuity Association of America has sponsored Ask the Expert posts for informational purposes only. Many of the experts are unaffiliated with Teachers Insurance and Annuity Association of America, College Retirement Equities Fund, and their affiliates and subsidiaries (collectively TIAA), and TIAA makes no representations regarding the accuracy or completeness of any information on the posts or otherwise made available by the experts. Statements of external featured experts are solely their own and are not endorsed or recommended by TIAA.
Responses from experts to questions posed by Woman2Woman community members are intentionally general in nature and are not intended to give personal, financial, or specific advice. Some strategies are complex, and more information is often needed to determine the personal needs of a community member. We strongly recommend that you consult with a financial advisor before taking any action based on an expertʼs opinion or other information you obtain from the Woman2Woman:Financial Living site so that all of your personal circumstances can be taken into consideration. Participation in the site does not render the member a client of the expert or of TIAA.
This site is not designed to accept or respond to requests or complaints regarding specific TIAA accounts, products or services. If you wish to discuss an issue of that nature, please contact TIAA at 800-842-2252. TIAA is not responsible for any opinions provided by members of this site. TIAA is not responsible for the content or privacy policies of third-party sites to which you may link.
The TIAA group of companies does not offer tax or legal advice. You should consult an independent tax or legal advisor for advice based on your own particular circumstances.
The material and responses are for informational or educational purposes only and do not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. The material and responses do not take into account any specific objectives or circumstances of any particular individual, or suggest any specific course of action. Investment decisions should be made in consultation with an investorʼs personal advisor based on the investorʼs own objectives and circumstances.
Experts may not have medical or scientific training. Any information related to physical or emotional health is not intended to be used in place of a consultation with a physician.
TIAA is not responsible for the statements of community members. We may link to posts made by community members only to direct you to topics that may be of interest to you. This does not mean that we agree with the opinions of these community members. Their statements are solely their own and are not endorsed or recommended by TIAA.
January 4, 2019