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Why a Big Tax Refund Could Be Bad For You

Here’s a shocker: Some Americans actually like doing their taxes. Sure, in Pew Research Center’s tax survey, more than half of the respondents reported that they actively dislike preparing their annual tax returns. But the surprise was that 34% enjoy preparing their taxes. Why? It doesn’t take a fancy study to know the answer — because they look forward to getting a refund.

Opening your refund check envelope, or seeing your money directly deposited into your bank account, is a great feeling. But there can be too much of a good thing. If your tax refund check is looking a little large, you might be overpaying your taxes. And potentially losing out on interest you could be earning.

Big Refund vs. Extra Monthly Cash: An Example

Let’s say you receive a $2,000 refund. Awesome, right? You could splurge on a vacay, sock away money for a rainy day or pay off part of the student loan bill that’s preventing you from buying a new home. Now, divide that amount by 12. That’s about $166 a month you could have had throughout the year if you didn’t have that money withheld from your paycheck.

If you’re on a tight budget, $166 extra for monthly expenses could mean you finally have cash for date nights. Or paying down debt. Or it could mean the difference between paying all of your monthly bills and going into even more debt.

Another option would be to invest that extra $166, whether that means buying stock or putting it into a high-yield savings account or money market to earn interest. You could also opt to put that extra cash into your 401(k), IRA or other retirement plan. While you probably won’t earn that much interest in a year (less than $15 with a 1.8% APR savings), if you continue saving monthly over 20 years that interest will add up. In our 1.8% savings example, your extra interest earned would add up to $8,000!

Initial Deposit


Monthly Deposit


Interest Rate


Interest Over 20 Years


How Do I Get That Extra Money?

If you consistently get a large refund and you want to spread some of that extra money throughout the year, you’ll need to change your withholding. That means filling out a new W-4 form (labeled the Employee’s Withholding Certificate) and submitting it to your employer/s.

A new version of this form was introduced in 2020. View the new W-4 online. You’ll automatically fill out this form if you change employers. But you don’t have to wait to land a new gig — you can choose to fill out a new W-4 at your current job if you wish to change your withholding.

Filling Out a W-4

The new W-4 form has five steps, with #1 and #5 required for everyone. You’ll only complete steps 2, 3 and 4 if they apply to you. Here’s a quick primer:

  1. Enter your personal info. This is the section with your name, address, social security number and filing status. Easy peasy.
  2. Two Earners/Multiple Jobs: Only fill out this section if you are married filing jointly and your spouse works OR you have more than one paid job. Use either the W-4 worksheet included with the form or the estimator at irs.gov/W4app to figure out the dollar amount you’ll claim here.
  3. Got dependents? This is where you’ll claim the child tax credit ($2,000 per child under 17 if you meet the income requirements) and other dependent credits. Again, follow the app or worksheet for specifics.
  4. Miscellaneous adjustments: Itemized deductions, extra withholding dollars and other income goes in this section.
  5. Sign the form. Let’s make sure everything’s legal, ok?

The Bottom Line about Big Refunds

Getting a large annual tax refund isn’t necessarily a bad thing. If you’re more apt to save a one-time windfall like a refund over a smaller monthly amount that you wouldn’t miss, then keeping your withholding high could actually benefit you in the long run. No need to make any changes.

On the other hand, if you’re likely to spend your refund on a sweet Caribbean vacay or other non-essential purchase, it might be wiser to decrease your withholding and funnel any extra cash in your paychecks into a savings, investment or retirement account. If you’re wondering how to get started with investments, download our free Beginner’s Guide to Investing for a quick comparison of easy, medium and experienced options. We also recommend consulting a tax professional for questions about changing your withholding and how that could affect you at tax time.

Whether you’re in the camp that hates prepping your taxes or you’re literally dreaming about plans for your tax refund right now, it’s worth doing the research to see if you’re making the right call. Withhold more? Keep the status quo? Whatever you choose, it’s smart to make sure you’re getting the biggest bang for that tax buck!

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The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.