Making the most of your tax refund

Crossposted from Medium.com. This column was originally posted online on April 5, 2016.

Each year at this time, many consumers receive the largest lump sum payment they will see all year – their income tax refund. This seems like it should be a “golden moment” to save. But for many people, making ends meet throughout the year is tough, and the tradeoff between saving versus other uses for the money can be difficult. This year, if any tax return money is left over, consumers should consider using a portion of it to build an emergency fund to cushion them against financial difficulties, or to start a nest egg.

A recent study by the Corporation for Enterprise Development showed that 44 percent of American households do not have enough savings to cover their expenses for three months if they lose their source of income, and 17 percent have no savings whatsoever. Saving even a portion of a tax refund can help consumers get through times of financial uncertainty. Last year, 73 percent of households received a refund that averaged $2,953.

If they have any money left over after paying their bills, many consumers may want to splurge by spending their tax refund on a new television or a much-needed vacation. Yet, depending on their individual financial needs, consumers should also think about saving some money to get out in front of unexpected setbacks later in the year. Others may consider saving to get closer to their financial goals, such as paying for college, owning a home, or planning for retirement.

At the Consumer Financial Protection Bureau (CFPB), our mission is to protect and empower consumers, which includes helping people strengthen their financial independence. Helping people save is core to that mission. That is why we encourage consumers to make the most of their tax refund by taking a few simple steps.

Consumers with income under $62,000 per year can save money on the front end by using free tax filing options. They can use software offered by major tax preparation firms through the “Free File Alliance” sponsored by the IRS. If consumers have incomes under $54,000 per year they can get free help from a Volunteer Income Tax Assistance (VITA) program in their community , where IRS-certified volunteers prepare and file tax returns electronically.

Many consumers who use commercial tax preparers pay their fees with an advance on their refund. But these advances carry extra costs, and it can be cheaper to pay the fees up front.

Commercial tax preparers may also offer incentives, like tax refund anticipation loans, so that consumers receive their money quicker. The fees on these loans can be very high, so consumers may be better off waiting to get their whole refund from the IRS. By using direct deposit, the refund will usually come within 21 days, more than twice as fast as a paper check.

During tax season, consumers should be on the lookout for scammers eager to steal their tax refunds. People can protect against tax fraud by staying alert for scam phone calls and refusing to give personal or credit card information over the phone or online. The IRS does not call or email consumers asking for personal information or demanding immediate payment.

Saving at least a portion of their tax refund can help consumers handle unexpected expenses in the future. The IRS allows tax filers to directly deposit their refund in as many as three separate accounts. That means a consumer could have the IRS send some of the refund to a checking account to cover immediate expenses and send the rest of it to a savings or retirement account.

Consumers can also sign up for a new myRA starter retirement account and directly deposit part of their refund in that account. The myRA is a new retirement savings account backed by the Treasury Department. It is simple, safe, and affordable – there is no fee to open or maintain it – and it is especially designed for people who may not have any other retirement saving options.

Tax season is a unique opportunity for consumers to make the most of their tax refund, by building savings and preparing for future expenses. We encourage everyone to seize this “golden moment” to save now, and breathe easier later.

Learn more about using tax time to save at /tax-time-saving/

Richard Cordray is the Director of the Consumer Financial Protection Bureau.