Many companies featured on Money advertise with us. Opinions are our own, but compensation and
in-depth research may determine where and how companies appear. Learn more about how we make money.

Money is not a client of any investment adviser featured on this page. The information provided on this page is for educational purposes only and is not intended as investment advice. Money does not offer advisory services.

Francesco Ciccolella for Money

You’re getting a federal tax refund! It’s like finding a forgotten twenty-dollar bill in the pocket of your winter coat — but instead of just twenty bucks, a refund could leave you with a windfall of hundreds or thousands of dollars.

By last April 15, nearly 100 million Americans had received an average more than $2,700 back from Uncle Sam, according to IRS data. But while American consumers love what feels like found money, financial planners are far less enthusiastic. A refund isn’t money from the sky, they point out. A refund just means that you withheld too much money from your paycheck. You’ve given the government an interest-free loan.

Are refunds a reason for celebration or consternation? We asked planners on both sides of the question.

A Refund Is a Bad Idea

“There’s no financial benefit to not getting your money in your paycheck now,” says Taylor Venanzi, a financial planner in Philadelphia. “A refund means you’re giving your cash flow and income to the government in an interest-free loan.”

The interest rate on one-year U.S. bonds is around 1.5%, so any interest the government could hypothetically pay on that loan would be very small: about $15 for every $1,000 in your refund. But you could get a far higher return from that money if you used it in other ways — to pay off high-interest debt, for instance, or as part of a long-term investment that pays more than 1.5%. (Your retirement account probably qualifies.)

“Instead of getting that lump sum in April, you could spend the year paying down a credit card balance that’s costing you 6% to 22% annually,” says Gregory Young, a financial planner in North Kingstown, R.I. “You could spend the year putting 1% more in your IRA or in other savings, such as an emergency fund.” An easily accessible account containing three to six months of living expenses can be crucial in getting through a period of unemployment or an expensive car repair.

William Sweet, a New York financial planner, says that there’s one more reason to skip a tax refund: tax identity theft. The IRS has made substantial inroads in reducing this kind of fraud, which dropped from 677,000 taxpayer victims in 2015 to 199,000 in 2018, the most recent year for which figures are available. It’s done this (in part) by scrupulously investigating any hint of trouble, such as mismatches between information on tax returns and the data the agency has on file.

If you’re not due a refund, there’s nothing for fraudsters to steal, and that could save you considerable grief. If you are owed a refund and there is any hint of identity theft or fraud, the IRS will lock the return until it verifies your identity. “That happens to 5% to 10% of taxpayers, anecdotally,” Sweet says. If you’re in that group, you’ll wait even longer for your money.

Go Ahead — Get That Refund

There’s one circumstance in which it’s fine to have a federal tax refund: if you can’t manage to save money any other way. “If you know that you won’t have the discipline to put aside that money, then let Uncle Sam save it for you. It’s better to save than to not save,” Young says.

Of course, this makes sense only as long as you find productive uses for your savings. A recent JPMorgan Chase study suggests that some — though certainly not all — people do just that, finding big post-refund bumps in spending to reduce student loan and mortgage balances, as well as healthcare bills, in addition to more extravagant outlays like travel.

At 1.5% interest, a taxpayer is giving up $54 to get an average-size refund. “If that’s the fee that they’re paying to save money, I don’t really see the harm,” Sweet says. “In a perfect world, where we did everything that’s good for us at every single moment, people would break even on their taxes. But we don’t live in that world.”