Whether or not it is the best strategy for saving money, many people do rely on their tax withholding as a kind of "forced savings plan." The problem, however, is that quite often these same people have other lapses in discipline, as well, and spend the refund rather than apply it to investing, debt reduction or retirement. Again, you may have a workable savings plan already, and may also have the financial habits that allow you to control your spending and keep your obligations low. Not everyone can do that, however, and once again a solution comes from the Internal Revenue Service (IRS). You can now save through withholding and put that money where you want it with a split refund.
In the 1980s and 1990s, improving telecommunications and computing technologies led to modern conveniences in banking, among which is direct deposit. When your company and bank cooperate on direct deposits, you are usually able to get paychecks into your checking and/or savings accounts with no fuss and no muss. You may even do this now, and if so, you know how well it can work if you keep things transparent, spending only what you've budgeted for the checking account and leaving the savings alone to grow, undisturbed. You can now do the same thing with your annual tax refund.
Better than no savings at all
Some financial "purists" argue that no one - and they really mean, no one - should ever allow over-withholding to occur through the year to build up a big refund. They claim, correctly, that you could do much better tweaking your withholding on your W-9 form so that you get all that money on your checks throughout the year. That way you can deposit the funds into an interest-bearing account and do much better than with the "IRS savings plan," by which you are actually making interest-free loans to the government. By the time you get your money, its value is reduced by whatever the year's inflation rate was, and even in times of no inflation you are losing out on extra interest.
While all this is true, it is also true that some people just are not able to discipline themselves with their income, savings, bill paying and investing. They try and try and can never seem to put two dollars together. Getting a tax refund that represents a year of over-withholding is the only way they have ever been able to accrue a four-figure sum of money. The problem is compounded for some people, as they are also unable to control their spending when the refund arrives. What are they supposed to do?
How a split helps you plan
The fact is, millions of Americans look forward to filing their tax refunds, just as millions of others dread the prospect. Many of those looking forward to it are thinking of the "biggest chunk of change" they will receive all year, a sum that offers an opportunity to kick-start a savings account, invest in the stock market, buy mutual funds or pay down debt. With the means of directing your tax refund into as many as three different accounts, you can even accomplish multiple goals with the one sum. You can make sure your refund goes where it is supposed to go, and does what it is supposed to do.
All you have to do to take advantage of the split tax refund is file Form 8888 with your return. You can specify one, two or three accounts so your checking, savings and IRA accounts can all receive a specified amount of your refund. Naturally, the form will need the name of the financial institutions, their routing numbers and the individual account numbers for each. As you prepare for tax time, make sure you have the right information by contacting each financial institution that you want to include on Form 8888 and confirming the data. Conveniently, you can opt for the split refund whether you file by mail or do so electronically, and whether you use a preparer or not. It's easy, simple and direct, just as it should be. It is your money, after all.
Your choice
You can still have your refund deposited directly into a single account just by filling in the appropriate information where requested on the standard Form 1040. For the split refund, you need to file Form 8888, which is a safe, fast and 100% dependable way of putting your refund to work as fast as possible. Your refund will be processed up to twice as fast as a paper check.
Again, it may not be the best savings plan to over-withhold and get a tax refund, but if you cannot manage it any other way, at least this is a start. With split refunds deposited directly, you can make sure your money goes where you decided you want it, and not take the chance of spending it beforehand.
At Online Tax Extension we provide an irs extention and coordinate with the IRS on a personal and professional level to guarantee the smooth transfer of sensitive personal, financial, and tax information as quickly as the IRS computer system will accept it from us for as many of their forms as possible.
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