It’s March. The time of year when the early tax filers start to see their tax refunds in the mail. Marketers, sales people, car dealers and just about everyone with a product or service to sell knows this and are out to separate you from your money.
The IRS estimates that the average tax filer will receive a refund check of about $3,050. Here in MN, taxpayers can expect an average tax refund of $2,430.
That kind of money won’t change your life, but what you choose to do with it now can make a big difference over time. Rather than spending it on more stuff that you don’t need, consider leveraging your tax refund for even greater benefit in the future by using this easy hack:
Increase your retirement plan contribution. It’s so simple (and perhaps obvious). Yet, survey after survey shows that too many Americans aren’t adding enough to their 401(k) and other workplace retirement plans.
In fact, many of us fail to take full advantage of our employers’ matching contribution – free money that’s available just for adding more to our retirement plan at work.
According to research by Financial Engines, 25% of employees with company retirement plans fail to fully participate in the company’s matching contribution. Collectively, Americans leave over $24 billion of retirement money on the table every year or about $1,300 per employee.
A simple strategy to increase your retirement savings. If you received a $2,400 tax refund, I bet you could increase your retirement plan contribution by $200 a month without any net effect on your monthly cash flow.
Somehow you survived the past year without this money. Why not the next year?
What’s more, you might even reduce your tax bill for the current year in the process.
Here’s how it works:
Simply set aside your tax refund ($2,400 in this example) into a safe account that isn’t readily available, but that you could access if you really need it. A credit union or bank savings account works great for this.
Then, instruct your employer to increase your 401(k) contribution by $200 a month. Your net take home pay will go down accordingly, but you still have $2,400 in your savings account, if you come up short at the end of the month. My guess is that you won’t need to tap into this money, but this way you have the reassurance that the money is there if you need it.
When the year is over, not only will you have added an additional $2,400 to your 401(k), but your taxable income will have dropped by that amount as well. If you are in the 25% tax bracket, that saves you about $800 off your 2018 tax bill.
If this money qualifies for a matching contribution from your employer, you might add another $2,400 or more to your 401(k) balance.
This simple strategy will increase your annual retirement plan contribution by as much as $4,800 ($2,400 from you plus the potential employer match on your contribution) and you save $800 in taxes (assuming a 25% tax bracket) because you reduced your taxable income by the amount of your contribution.
Little tweaks like this make a big difference over time. Assuming a dollar-for-dollar match on your $200 per month 401(k) contribution and a modest 6% average annual return, you could increase your retirement account balance by over $185,000 20 years from now.
Even if you don’t get a company match, increasing your 401(k) contribution by the amount of your tax refund adds up to some serious change down the road. Cha Ching!